Sive Morten
Special Consultant to the FPA
- Messages
- 18,662
Fundamentals
So, today probably we do not need to invent any subject for discussion as everybody on market tells about it. Yes, I'm talking on collapse that has happened on the markets within last two weeks. There are different understanding of this event among traders. Some people start to speak about panic and tell that "everything is lost" and this is an end. Others talk that this was just negative occasional combination of different factors in one point - too strong anticipation of hawkish steps from ECB and BoJ and too large bets against dollar. Simultaneous drop as in stocks as in US yields that has trigger first stage of collapse. So a lot of talks about reasons but just few on consequences. What will be next?
I think that we need to take a look at some facts. This let's us easier to understand what to expect. First, let's start from US fundamental data. Indeed, major numbers look very good as forecasts do either. NFP data, GDP, Inflation. You can't just ignore this. Major driving factor here is inflation of course, as traders fear of more aggressive steps by Fed. Indeed, - wage growth data stands at 2.9% YoY basis. On the chart you also see predefined target of this possible uptrend. It stands in 3.5-4% range.
Now take a look at 10-year bond yields and our forecast. This is first target and it stands around 3.3%. We also have extended target here (not shown) which points on 4.7%
Now let's take a look at anticipation of 5 year inflation by markets:
Long term yields mostly response and show anticipation of inflation rate while short-term ones stand in tight relation with Fed rate. Combining all these data we have stronger Wage growth, stronger anticipation of inflation, rally in long-term yields and positive data. This is not just short-term spike in data. Growth stands since the middle of 2017. Process stands under way and it is matched to second stage of economy cycle. It calls Inflationary growth stage, when signs of inflation becomes stronger and central banks start to rise rates.
First period of growth calls "non-inflationary growth" when economy has turned to uptrend while signs of inflation still stand weak. This is gold time for equities. Now it seems that this stage is over. While inflation pressure becomes stronger - stock market starts to feel more pressure as from bond yields, since they become more attractive for investments as in earning results of companies as borrowing cost of capital is rising and business becomes more expensive.
Here guys, we could meet Pandora box. Because in time of "easy money" from the Fed in QE1-QE3 a lot of liquidity where put in shares buyback. This artificially have increased earnings per share ratio and led to further stock growth without any improvement in fundamentals. Many companies borrowed a lot in period of zero rates. Currently it is difficult to foresee what really could happen, when companies will start unwind this...
That's being said, as bond yields get more attractive, this puts extra pressure onto equity markets as investors can get a safer yield in credit.
Now is to stock market. In general, drop was not a record. It was two times smaller than in 2008 and there are at least 20 drops exist in 2 decades when one day decrease was greater. But...
By Reuters service - Equity funds saw their coffers shrink $23.9 billion for the fund-flows week ended Wednesday, February 7, 2018. This number represented the largest one-week net outflows since Thomson Reuters Lipper started tracking fund-flows data (1992) and the largest since the global financial crisis (-$22.6 billion for the fund-flows week ended June 25, 2008).
It is difficult to say either that this is just short-term correction. Eight major indexes stands at all time highs while others are coiling nearby. Before retirement, Yellen has given assessment of stock market to CNBC channel:
"Well, I don't want to say too high. But I do want to say high," she said. "Price/earnings ratios are near the high end of their historical ranges."
In addition to elevated equity prices, Yellen also said commercial real estate is "quite high" compared with rents.
"Now, is that a bubble or is too high? And there it's very hard to tell. But it is a source of some concern that asset valuations are so high," she said.
We also have warned last week about VIX index that was at absolute lows for considerable time and this was a silence before the storm. Jump in volatility was outstanding, so that Credit Suisse said on Tuesday it will shutter the VelocityShares Daily Inverse VIX Short-Term ETN, likely leaving holders with just pennies on the dollar. This fund has got hit for 90% by VIX spike:
So, what to expect further? Is this really an end for stock market? Well, I think we should not be too radical in our judgement. Yes, my opinion is - this is starting of reversal point for stock market. But now we stand not in crisis, as it was in 2008. This is not run to quality and run for liquidity. This is just rebalancing of trading portfolios, changing of priority.
That's why, this process will not be just in down direction. Stock market definitely will show a lot of flat action and deep pullbacks before major trend will change. Here is my major picture to show you. This is monthly chart of european DAX index. It looks a bit messy, but idea is quite simple. DAX has completed two major XOP targets in one point. One of them is all-time XOP. Even 3/8 retracement, which is normal behavior suggests drop for 3000-4000 points right to neckline of large H&S pattern here. If you will take a look in the circle - here you will find "puny" weekly H&S as well. It could put the start for this collapse.
At the same time, as you can see this action could last for 5 years or even longer. This is really big picture. As I said there will be a lot of pullbacks in this process and first one should start within 1-2 weeks as weekly pattern will start to form right shoulder.
In general right now S&P yield is higher than bond market - 4.1% vs. 2.8%. Average 10 year spread stands around 3.2% So stocks now are still more profitable than bonds. But as process will accelerate, pressure on stock market will increase.
That' being said - just taking in consideration real facts we've estimated - inflation anticipation is growing in US, stock market overheat as fundamentally as by assessment of Fed chairmen. Technically market stands at all-time objective target. This makes us think that odds stand not in favor of stock market rally continuation and indeed could point on start of major trend changing.
Speaking on FX market and EUR in particular - ongoing process just confirms our view - recent rally was not based on anything else but anticipations and expectations and we warned about this. Now when euphoria smoke melted away - is a time to re-establish status-quo.
COT Report
Recent CFTC data starts to show changing in sentiment. Last two months we've talked that EUR speculative positions stand at absolute highs and sooner or later - this should become a barrier for further growth, retracement should happen.
Now we see that first shorts are coming on market - net long position has decreased slightly
Source: Oanda.com
Techincal
Monthly
So, as we've estimated, EUR stands at rather strong resistance area - monthly K-resistance 1.2516-1.26, accompanied by YPR1 @ 1.2617 area. Retracement indeed is ripping and we start to reap first fruits of this action. At least now we see clear response, even on monthly chart.
Besides, many other markets across the board forms reversal formations on daily chart, also after extended rallies. For example, on NZD we have DRPO "Sell".
Add here sentiment situation with highly saturated long positions and you will get perfect area for retracement. At least this is definitely not an area for long entry, if you're a long-term trader. For short-term traders it is possible to take long positions but with profit objectives around previous top and not count on upside breakout.
Dollar Index, in turn stands at oversold and monthly 5/8 Fib support. So, most conservative retracement target is 1.20-1.21 area. This correction will be painless for overall bullish picture.
Finally, another interesting detail, guys - actually EUR has completed upside harmonic retracement..
Weekly
This chart we use to estimate different scenarios and depth of retracement.
Weekly charts in fact shows two possible scenarios of retracement. First is light scenario - just minor response to butterfly by 3/8 retracement to 1.21 Fib support. Second is heavy scenario, if butterfly will become a part of H&S pattern. Between this scenarios could be the chance for H&S failure. In this case EUR could re-test long-term 1.16 support but then will turn to new highs.
As you understand right now we're mostly interested in 1.21 scenario.
Last week's result is clear "Evening star" candlestick pattern that is formed right at top of butterfly pattern and weekly OS. Common target of this pattern is the length of its bars. It means that downside action should get a continuation, which means that 1.21 area should be hit with high probability.
Daily
As we've talked a lot about daily picture last week. Now we even keep short position on DXY in anticipation of B&B trade and deep retracement, today I'll show you a bit different picture, which seems interesting.
Here is favorite 50% EUR level - 1.2050, which coincides with Monthly Pivot Support 1 and former top. Most probable scenario that we will get a kind of AB-CD downside action:
As you understand, trading subject for coming week is minor upside action which should be "BC" leg.
Intraday
Although we've talked about taking short position on DXY even on Wed, action just can't get started as EUR still can't finally reach major XOP target. As EUR takes more than 50% of DXY, it keeps Dollar index from action.
As you can see our warning about another leg down on Friday was correct. Indeed, despite that in the morning picture has shown lovely diamond pattern but as usual, it was fake diamond
Here just one step separates us from starting upward action on EUR. So, if you do not like DXY trade - you could think about using of 4-hour butterfly at major XOP target to go long...Upside potential should be significant - somewhere 100-150 pips, so market could re-test "B" point lows around 50%-5/8 Fib level.
Conclusion:
Although we indeed think that major trends in global economy are changing, we do not support panic rumors on collapse. In long-term perspective more reasonable and fair assessment of EUR/USD balance should come, which should lead to moderate retracement on weekly/monthly charts.
On coming week we count to see upside action on EUR that should be 1/2-5/8 retracement of whole downside action.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
So, today probably we do not need to invent any subject for discussion as everybody on market tells about it. Yes, I'm talking on collapse that has happened on the markets within last two weeks. There are different understanding of this event among traders. Some people start to speak about panic and tell that "everything is lost" and this is an end. Others talk that this was just negative occasional combination of different factors in one point - too strong anticipation of hawkish steps from ECB and BoJ and too large bets against dollar. Simultaneous drop as in stocks as in US yields that has trigger first stage of collapse. So a lot of talks about reasons but just few on consequences. What will be next?
I think that we need to take a look at some facts. This let's us easier to understand what to expect. First, let's start from US fundamental data. Indeed, major numbers look very good as forecasts do either. NFP data, GDP, Inflation. You can't just ignore this. Major driving factor here is inflation of course, as traders fear of more aggressive steps by Fed. Indeed, - wage growth data stands at 2.9% YoY basis. On the chart you also see predefined target of this possible uptrend. It stands in 3.5-4% range.
Now take a look at 10-year bond yields and our forecast. This is first target and it stands around 3.3%. We also have extended target here (not shown) which points on 4.7%
Now let's take a look at anticipation of 5 year inflation by markets:
Long term yields mostly response and show anticipation of inflation rate while short-term ones stand in tight relation with Fed rate. Combining all these data we have stronger Wage growth, stronger anticipation of inflation, rally in long-term yields and positive data. This is not just short-term spike in data. Growth stands since the middle of 2017. Process stands under way and it is matched to second stage of economy cycle. It calls Inflationary growth stage, when signs of inflation becomes stronger and central banks start to rise rates.
First period of growth calls "non-inflationary growth" when economy has turned to uptrend while signs of inflation still stand weak. This is gold time for equities. Now it seems that this stage is over. While inflation pressure becomes stronger - stock market starts to feel more pressure as from bond yields, since they become more attractive for investments as in earning results of companies as borrowing cost of capital is rising and business becomes more expensive.
Here guys, we could meet Pandora box. Because in time of "easy money" from the Fed in QE1-QE3 a lot of liquidity where put in shares buyback. This artificially have increased earnings per share ratio and led to further stock growth without any improvement in fundamentals. Many companies borrowed a lot in period of zero rates. Currently it is difficult to foresee what really could happen, when companies will start unwind this...
That's being said, as bond yields get more attractive, this puts extra pressure onto equity markets as investors can get a safer yield in credit.
Now is to stock market. In general, drop was not a record. It was two times smaller than in 2008 and there are at least 20 drops exist in 2 decades when one day decrease was greater. But...
By Reuters service - Equity funds saw their coffers shrink $23.9 billion for the fund-flows week ended Wednesday, February 7, 2018. This number represented the largest one-week net outflows since Thomson Reuters Lipper started tracking fund-flows data (1992) and the largest since the global financial crisis (-$22.6 billion for the fund-flows week ended June 25, 2008).
It is difficult to say either that this is just short-term correction. Eight major indexes stands at all time highs while others are coiling nearby. Before retirement, Yellen has given assessment of stock market to CNBC channel:
"Well, I don't want to say too high. But I do want to say high," she said. "Price/earnings ratios are near the high end of their historical ranges."
In addition to elevated equity prices, Yellen also said commercial real estate is "quite high" compared with rents.
"Now, is that a bubble or is too high? And there it's very hard to tell. But it is a source of some concern that asset valuations are so high," she said.
We also have warned last week about VIX index that was at absolute lows for considerable time and this was a silence before the storm. Jump in volatility was outstanding, so that Credit Suisse said on Tuesday it will shutter the VelocityShares Daily Inverse VIX Short-Term ETN, likely leaving holders with just pennies on the dollar. This fund has got hit for 90% by VIX spike:
So, what to expect further? Is this really an end for stock market? Well, I think we should not be too radical in our judgement. Yes, my opinion is - this is starting of reversal point for stock market. But now we stand not in crisis, as it was in 2008. This is not run to quality and run for liquidity. This is just rebalancing of trading portfolios, changing of priority.
That's why, this process will not be just in down direction. Stock market definitely will show a lot of flat action and deep pullbacks before major trend will change. Here is my major picture to show you. This is monthly chart of european DAX index. It looks a bit messy, but idea is quite simple. DAX has completed two major XOP targets in one point. One of them is all-time XOP. Even 3/8 retracement, which is normal behavior suggests drop for 3000-4000 points right to neckline of large H&S pattern here. If you will take a look in the circle - here you will find "puny" weekly H&S as well. It could put the start for this collapse.
At the same time, as you can see this action could last for 5 years or even longer. This is really big picture. As I said there will be a lot of pullbacks in this process and first one should start within 1-2 weeks as weekly pattern will start to form right shoulder.
In general right now S&P yield is higher than bond market - 4.1% vs. 2.8%. Average 10 year spread stands around 3.2% So stocks now are still more profitable than bonds. But as process will accelerate, pressure on stock market will increase.
That' being said - just taking in consideration real facts we've estimated - inflation anticipation is growing in US, stock market overheat as fundamentally as by assessment of Fed chairmen. Technically market stands at all-time objective target. This makes us think that odds stand not in favor of stock market rally continuation and indeed could point on start of major trend changing.
Speaking on FX market and EUR in particular - ongoing process just confirms our view - recent rally was not based on anything else but anticipations and expectations and we warned about this. Now when euphoria smoke melted away - is a time to re-establish status-quo.
COT Report
Recent CFTC data starts to show changing in sentiment. Last two months we've talked that EUR speculative positions stand at absolute highs and sooner or later - this should become a barrier for further growth, retracement should happen.
Now we see that first shorts are coming on market - net long position has decreased slightly
Source: Oanda.com
Techincal
Monthly
So, as we've estimated, EUR stands at rather strong resistance area - monthly K-resistance 1.2516-1.26, accompanied by YPR1 @ 1.2617 area. Retracement indeed is ripping and we start to reap first fruits of this action. At least now we see clear response, even on monthly chart.
Besides, many other markets across the board forms reversal formations on daily chart, also after extended rallies. For example, on NZD we have DRPO "Sell".
Add here sentiment situation with highly saturated long positions and you will get perfect area for retracement. At least this is definitely not an area for long entry, if you're a long-term trader. For short-term traders it is possible to take long positions but with profit objectives around previous top and not count on upside breakout.
Dollar Index, in turn stands at oversold and monthly 5/8 Fib support. So, most conservative retracement target is 1.20-1.21 area. This correction will be painless for overall bullish picture.
Finally, another interesting detail, guys - actually EUR has completed upside harmonic retracement..
Weekly
This chart we use to estimate different scenarios and depth of retracement.
Weekly charts in fact shows two possible scenarios of retracement. First is light scenario - just minor response to butterfly by 3/8 retracement to 1.21 Fib support. Second is heavy scenario, if butterfly will become a part of H&S pattern. Between this scenarios could be the chance for H&S failure. In this case EUR could re-test long-term 1.16 support but then will turn to new highs.
As you understand right now we're mostly interested in 1.21 scenario.
Last week's result is clear "Evening star" candlestick pattern that is formed right at top of butterfly pattern and weekly OS. Common target of this pattern is the length of its bars. It means that downside action should get a continuation, which means that 1.21 area should be hit with high probability.
Daily
As we've talked a lot about daily picture last week. Now we even keep short position on DXY in anticipation of B&B trade and deep retracement, today I'll show you a bit different picture, which seems interesting.
Here is favorite 50% EUR level - 1.2050, which coincides with Monthly Pivot Support 1 and former top. Most probable scenario that we will get a kind of AB-CD downside action:
As you understand, trading subject for coming week is minor upside action which should be "BC" leg.
Intraday
Although we've talked about taking short position on DXY even on Wed, action just can't get started as EUR still can't finally reach major XOP target. As EUR takes more than 50% of DXY, it keeps Dollar index from action.
As you can see our warning about another leg down on Friday was correct. Indeed, despite that in the morning picture has shown lovely diamond pattern but as usual, it was fake diamond
Here just one step separates us from starting upward action on EUR. So, if you do not like DXY trade - you could think about using of 4-hour butterfly at major XOP target to go long...Upside potential should be significant - somewhere 100-150 pips, so market could re-test "B" point lows around 50%-5/8 Fib level.
Conclusion:
Although we indeed think that major trends in global economy are changing, we do not support panic rumors on collapse. In long-term perspective more reasonable and fair assessment of EUR/USD balance should come, which should lead to moderate retracement on weekly/monthly charts.
On coming week we count to see upside action on EUR that should be 1/2-5/8 retracement of whole downside action.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Last edited:
