Thursday, June 16, 2011

Is The US Dollar Really Doomed?

Is The US Dollar Really Doomed?

I don’t think so.  At least for the next 3 to 4 years.

As I have been regularly posting here, my contrarian beliefs towards the USD still hold and will be further explained here.

I will show the technical analysis point of view which led to the search for deeper insights that could lead to an explanation on why my charts were pointing me towards the vision of a higher USD and the descent of other assets.

I will also try to expose a thought process that can be very ”convenient” as to understand the herd mentality in order to explain the “Contrarian  Investor” mentality.  

First: Let me clarify that ALL my trading is based on trend following principles coupled with statistical analysis that convert into measurable Probabilities. A lot of geometry is used too.

Second: I am not a specialist on fundamentals and do none of my trading based on economical outlook or economical bias.

Third: I do make predictions, but they are, by no means, a basis for my trading methods/techniques.

Fourth: All of my predictions are based on chart analysis ONLY.

Fifth: I cross check my analysis with ‘proxy’ assets to make sure that I don’t guide my mind into an erroneous line of thought.

Sixth: Once I have formed my prognosis, than I go search for plausible explanations that can be found in history, economics and more important, in GEOMETRY.

My recent skepticism about the American Dollar, began with the widespread mentality that stated that  “The Dollar is Doomed” or the “Buck is dead”.

Whenever I see everybody running in bunches towards something that seems to be too obvious, I tend to think otherwise. If anything that is too obvious actually turned into a reality, than everybody in any particular market would be overwhelmingly successful. Obviously this is not the case.

Therefore, when obvious situations appear I switch into my ‘Contrarian Investor” mode.

Being an FX professional, I began my search by performing the usual technical analysis on the USD index (USDx). Needless to say that the USD is the principal currency, as it works counter to the other major currencies thus creating the MAJORS.

The technical picture provided by the USDx pointed towards a strong valuation of the buck perhaps into the year of 2013 (or more).

The 240. min chart demonstrating a reversal pattern. this pattern could have been projected since May 27.

The weekly chart with two different formations. Whichever one is correct, the outcome most-likely will be the same.

As I got stunned with this initial finding, I headed into complimentary information by doing the same with other ‘proxy’ assets.

The Oil charts also indicated a drop in the value of this commodity for the following years. This was another big hint.

The oil daily chart with a MACD minimum bear target.

The Oil weekly chart with a projected diamond. Although just a projection as of now, it has a high probability of unfolding into something really similar to this picture.

I did the same with the DJI (Dow Jones Index) and found a technical chart rendering  a very pessimistic picture for the Dow. Actually, the photograph showed that equities were in the verge of jumping from a cliff.

The Dow Jones Industrials Index demonstrating it's in the verge of breaking a diamond consolidation formation.

Similar picture, although the characteristics were (are) a bit different, could (can) be seen in the Gold charts.

Finally, I switched back to FX and did the usual analysis on other majors. ALL of them indicated a major reversal. The pound and fiber had very interesting technical pictures and still have.

Cable with an H&S formation. This one could have been seen as a diamond formation as well.

EURUSD has fully formed a diamond consolidation pattern. i tend to see parity or even below parity a reality.

I tend not to be doubtful on my TA, however could all of this be happening at the same time in different assets and especially when EVERYBODY was pointing in a different direction?

Being humble here was key to my ‘wedded’ conclusion.

Once I had the technical picture in place, I went to search for further explanation.

At this point, not to my surprise, I found John Taylor, the founder and CEO of Fx Concepts, the largest currency hedge fund in the world, saying that he was going to be long in the USD in 3 or 4 days.  Well, I knew that 3-4 days was really close to being the apex of a potential level on the USDx charts. But still, 3 or 4 days!?!?

John Taylor is obviously one of the regents in this market.

Skepticism still remained.

My next logical step was to find a cyclical economic explanation to the phenomena.

My researched landed on Martin Armstrongs Economic Cycle Model.

Armstrong was the one to observe the shifts in capital flows hit the markets every 8.6 years across many asset classes. The estimate of magnitude seemed to revolve around periods of 51.6 years, which embraces a series of 6 business cycles of 8.6 years each. Armstrong revealed that the economic cycle concept can be backtested into ancient history going back to the Greek and Rome empires and all monetary systems that followed.
Later, he realized that 8.6 years was exactly three thousand one hundred and forty-one days: 3,141, the number pi times a thousand. This is not to confuse with Phi, also called the golden ratio, represented by the irrational number 1.618. While the general interest in phi and the Fibonacci sequence goes back many decades, the Pi number has not really served as a financial cipher.  At least not for the general public.
A big Pi date was July 20, 1998. The European markets had captured the greatest intensity between 1996 and 1998 and Russia too had reached a peak intensity which marked the high point in the S&P 500. This was just before a Russian default broke the giant hedge fund Long Term Capital Management nearly collapsing the entire world's financial system.
Armstrong's work also identified November 2002 which turned out to be a major bottom, when both the S&P 500 and the NYSE made their final highs in that month. The next important turn date was January 1st, 2005 - the date which marked the high for the NASDAQ for the year. The next turn point wouldn't come until February, 23, 2007. This time the market didn't exhibit major price turns, and the forecast was seen with disdain by Armstrong skeptics. But the precise date turned out to be the peak of the easy-money bubble with some of the tightest credit spreads ever.
The most recent turning point coming from Martin Armstrong's economic cycle studies signaled the June 13/14 2011 as a major reversal of fortune in financial markets.

Coincidence or not, June 14th -15th was a date in which the USD made a massive move upwards.
If one would draw a few lines on the USD Index on higher time frames using the turning points as connecting points, than a geometrical technical formation could be drawn with no hassle.

By the way, Pi is a geometrical “magical” number.

Regardless of the usual technical analysis versus fundamental analysis debacle, it’s a fact that some sort of physical manifestation is present when these kinds of inversions occur.

My conclusion relies on a very familiar character known to those who participate  on trading or financial market activities: “The Contrarian Investor”.

In order to explain the “Contrarian Investor” mentality, I need first to define the ‘herd’ mentality.

The most succinct definition for ‘herd’ mentality is: "how large numbers of people act in the same ways at the same times."

Now, how is this achieved?

Well, the market regents use the media, the news and the power they have (our savings) to generate a sufficiently strong driving force in one direction thus convincing multitudes that their views, expectations and forecasts are not only plausibly real, but they are carved in stone.

How many times have you seen a who is who investor or analyst, using the TV as a means to tell that the gold will rise? That he is SHORT on the dollar? Or even that planet Mars is the next great place to buy real estate?

I bet all of us have seen this movie countless times.

This is where and how the Contrarian Investors make all their profit.

Therefore, market regents drive investors into a herd mentality that will lead to exploitable mispricings in different assets. This is how they use their overwhelming financial power (your and my savings) to change hands. In this case, they will take possession over what they have leased to them but is not in their real possession.

A contrarian does not necessarily have a negative view of the overall market, nor does he have to believe that it is always overvalued, or that the conventional wisdom is always wrong. Rather, a contrarian CREATES opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced. While more "buy" candidates are likely to be identified during market declines (and vice versa), these opportunities can occur during periods when the overall market is generally rising or falling.

This is nothing different from those huge fishing boats that set up their wide nets to grab the tuna coming from a contrary direction.

Avoiding those fish traps is a BIG SECRET still to be unfolded by the average retail trader.  Sometimes even large banks or institutions get caught in those traps with no prior advise what so ever.

People can claim to know the mentality of the market players.  I truly believe a lot of people really can. However, this cannot be transformed into reliable trading signals by the simple fact that there are no tangible levels as to place an entry, a reasonable stop and a target.

Therefore, I conclude that the best way to handle any situation is, as small retail investor, to jump on the boat in the same direction of the short, mid term move. This will give me statistic advantage over positions against the current trend.

After this turning point, I could humbly say that the buck is a very safe bet as well as the Yen and CHF against the crosses other than with the USD. Perhaps buying Japanese Treasury Bonds wouldn’t be a bad idea after all.

Also, commodities are now on the SHORT side of things.

Finally, I would like to mention that I am not very fond of being regarded as a TUNA.

Stay sharp.



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