Another day, another disappointment
Another day and another
disappointment on the inflation front that sparked a rally for the
stock market bulls and euro bulls alike….even if the “core” reading did tick
up.
Recall that we closed out our long USDCHF position last week
from 1.2350 near the highs at 1.2430 because we wanted to see how the euro
reacted to sitting on weekly trendline support. The reason was as we said, “is
that 1.2450 holds enough resistance that we’d like to see how the market reacts
around these levels. The euro is still the main wildcard and a move below 1.27
could see a swift correction back to 1.25. However, failure to do this could see
a rally above 1.29 which would ignight further gains to 1.30/31 over the coming
days to weeks.”
We had said before that two big head fakes in the euro were
enough for us to sit back and let the market tell us what to do. That proved to
be the right decision as the dollar fell sharply, droping 1.5% already this
week. So, with that in mind our long AUDUSD and MEXUSD fared very well and we
continue to hold a very positive attitude to key commodity currencies.
Below we still see the euro as being in a larger “wave 5 of B
of IV” type consolidation pattern. This means a final run at 1.30/32 should then
see a reversal back to 1.24/25.
No change in the dollar index: The dollar index broke below
trendline support from the choppy advance since the May lows which we said to
buy and have since taken profits from. As we said last week, “We think a move
below 1.23 in USDCHF and we think that the chart pattern suggests a move down to
1.18/1.17 is in order. A break below 85 in USDX has confirmed a near term
bearish scenario.”
Gold: Gold continues to trend sideways in what may be in “wave
C,” down or a larger consolidation pattern. At this point it is not clear.
What is clear is that another pullback in gold will offer
another great opportunity to position long since our call to buy near the
support zone at $540/$580.
Recall that while wave C down may be underway, we view this as
another opportunity to position long (similar to our view when “wave A” ended).
This is because we expect the correction from $730 to end the larger “wave II”
pullback followed by a soaring “wave III” rally.
As we have said for months now, “In the broader picture, this
long awaited correction is underway and recall that a top here at $720 will mark
the end of “wave 1 of V” meaning a pullback to $580/540 would be “wave 2 of V”
followed by an explosive rally in “wave 3 of V” to new all time highs.”
Stocks: This market is still stuck between the 1,250 and 1,290
levels. Only a move below or above would give us a good clue as to its future
direction.
Recall that last week we warned that a move above downtrend
resistance at 1280 would be near term bullish. Prices have since rallied to
1,290. We are more inclined to go short from the 1,330 level and add to that
upon a break below the 1,240 lows.
As we have said time and again, “The market is extremely
optimistic that a peak in the Fed cycle will see a lower dollar and higher
stocks. Unfortunately, history says the exact opposite.”
Bonds: No change: Our bond forecast has been impecable, as we
have called each of the little twists and turns and pivot points. Since prices
have effectively pushed through channel resistance crossing at 105.50, just as
we forecasted, this suggests that a larger rebound is underway.
We continue to see a rally to 107/109 followed by a renewed
delcine below 104. The reason is that 104 will be a tough nut to crack the first
time around and the majority of players are already extremely bearish on bonds.
Crude Oil: Key to the near term bullish case is the trendline
support from February. This was breached and the pullback from our technical
target at $78/$80 can still be viewed as a correction but we must remain very
cautious as the Fed’s rate hiking cycle peaked, which is often in line with the
peak in production and oil prices. As we said weeks ago, “Traders are still
encouraged to take initial profits at the $78/$82 range and to now tighten up
remaining stops. If we do get a spike, a move to $90/$100 would be were we look
to cover and possibly reverse.”
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.