"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, September 24, 2014

US Dollar Breaks Through Overhead Resistance; Euro Sinks

King Dollar is back! If I am reading this chart correctly, it looks as if the Dollar is on track to manage SIX CONSECUTIVE HIGHER WEEKLY CLOSES. That is the first time that will have happened in more than 4 years!

The greenback has finally managed to push past a key technical chart resistance level near 85 basis the USDX.

While the trading week is not yet ended, if the Dollar can stay above this level noted on the chart to finish it out, I frankly do not see much in the way of further overhead resistance until one nears 86.50 - 87.00. If it does indeed go there, I do not think gold will be able to stay above $1200 as there should be a continuation of the general macro trade jettisoning most commodities should that occur.

The flip side to this is the abysmal showing of the Euro which continues to plummet. Simply put, the Eurozone economic growth has stalled out and its central bank is no where near talking about raising interest rates. That leaves the Dollar with its distinct interest rate advantage, the key factor that has been driving the currency markets for the last 4-5 months.

In looking at its chart, there is a bit of support just below the session low of today. Further down is a zone near 1.2665 - 1.2650. I do not see much in the way of support of any significance if the latter level were to give way. In other words, it is entirely possible that the Euro may see the 1.2000 level. You might recall that during the European sovereign debt crisis, the Euro was plumbing those depths. For TA purposes, that is a double bottom on the intermediate chart. Heaven help that currency if it were to lose that level for any reason!

With the Dollar as strong as it is, one can expect to see gold moving lower, and that is precisely what it is doing.

Here is the recent chart:

Price is attempting to stabilize near current levels; however, the key will be this week's low near the $1208 level. If the bulls can prevent the bears from taking price below that level, they have a change at stemming the bleeding and moving the market into a sideways pattern, halting the downtrend that has been in place. If not ( and especially if the Dollar continues to move higher), $1200 is going to be tested and will probably not hold. We'll just have to wait and see.

Shifting to the grains for a bit - that Corn/Wheat Spread, the one that has been keeping the big specs on the long ( and wrong) side of the corn market, once again failed near the 140 level. That just seems a bridge too far at this point. Corn managed to eke out some gains today as the forecast maps showed a rather large rain event scheduled to hit the corn belt near midweek of next week. That immediately set the bulls yapping about damaged crops, disease, delays in the harvest and the beginning of the Apocalypse. I read where one bullish analyst swore that he saw a Black Horse Rider going through the corn fields of Illinois with a big scale in his hands crying: " a quart of wheat for a denarius, and three quarts of barley for a denarius, and do not harm the oil and the wine".

We'll keep an eye on things but for now it looks to me more like a case where some shorts decided to book some profits on the forecasted rains to wait for a bounce higher to sell it again.

Also, there has been some chatter about increased export demand for US wheat, now that prices have fallen to near 5 year lows. I am interested in seeing if such develops for any reason. There are a significant amount of hedge funds and other large specs who are Long corn, and Short wheat, and if this spread reverses violently, we are going to see some interesting price action in the corn in particular.

I think the strong dollar is going to put a cap on any potential wheat rallies but that assumes that other key growing areas around the globe remain free of weather-related threats. Currently there is a large glut of wheat around but the one thing about that market is that other growing regions have to be monitored.

Wheat started the day on a strong note but lost about half its gains going in to the close. Still, it managed to maintain its footing and for a market that has been beaten with an ugly stick like it has, maybe there is something to it. Again, it is too soon to tell.

I am beginning to wonder if the cattle market is ever going to break down. It bends but does not break. Given the strength in the Dollar and the general trend towards selling commodities, and given especially the continued high price of beef which is even more expensive on the global export markets due to the strong dollar, I wonder how much longer the longs are going to keep coming in and supporting this market. Cattle are perhaps one of the few commodity markets that the longs have been able to make some money in and they seem determined to not throw in the towel, yet.

At this point I am still standing by my view that beef prices are going to be coming down by the 4th quarter and certainly by Q1 2015, but the bulls are flexing some very impressive muscles at the moment. Feeders especially are continuing to defy gravity. I frankly do not know how in the world those guys are going to be able to make the least bit of money buying feeders at these prices to sell next year.

That's it for now - the S&P 500 is on a tear once again and is back above 1990 as I type these comments. The same guys who are apparently buying equities must be the ones buying in the cattle markets because the price action is quite similar - the market will bend but then snap right back.

More later...hopefully....


  1. Livestock are mixed again today, up and down, back and forth. The market seems to be waiting on Friday’s USDA report as well as better packer margins for cattle. a few guys say spread hogs long against cattle as consumers will go for the cheaper meat.

    the ags have that rain in forecast for next week, but something new is a freeze for Oct 9-10 for 'most of the midwest'. also export sales in the morning thought to be strong, all helping ags into short covering.

    bubblin' crude back to the attitude! on the continuous chart it cleared that 92.50 again, and some are drawing a trendline from 2009 coming through this month lows. large specs that Dan highlighted so well when they were out of control long earlier in the year, appear to be at a 52 week low on the long side now!

    almanac dude saying fade the 'sell rosh' SPX trade which was on today's close, and he's not the only one who thinks we bounce due to the ES correction of -46 and it got near enough to the 50-day MA.
    TLT as well turned today away from the 50-day MA.
    buy rosh:

    sell rosh: http://www.equityclock.com/2014/09/23/stock-market-outlook-for-september-24-2014/


  2. Dan - Great commentary (as always). Just a couple of thoughts about wheat exports. The stronger dollar will presumably slightly undermine sales overseas and there is apparently a major transportation problem in the US at the moment. I read an article in the last couple of days which said that all the fracking activity has pretty much blocked up the railroads! From this side of the pond I can't judge the reality of that, but if the railways are that busy then freight charges (assuming there is any capacity to be bought) will presumably add to export costs? Just my 10c.

    1. Mark H;

      Thanks for the kind words.

      Yes, indeed, that is a good point and one which I think bears repeating. The ability of the nation to both store and move this year's massive crops is going to be challenged.

      Some keep talking bottom in prices but I think it is premature for that. Elevator hedge pressure is still not that pronounced.

      We'll see however.

  3. Oh and..... The Eurozone would probably view Euro weakness as a good thing. The biggest challenge there (here?) is growth. A weak Euro could help exports and boost growth. In the race of all currencies towards zero (to help stimulate growth) a strong $ (plus low oil costs) could be a breath of fresh air. I am however deeply confused why a strong US$ is being allowed at the moment? It doesn't exactly seem to be in the US' best interests as your economy isn't exactly strong? I assume that a strong $ helps undermine oil prices (which hurts Russia) and throws Europe a lifeline (exports) at a time when the US needs Europe's support on sanctions against Russia. It also hurts Saudi Arabia at a time where their loyalty may need some "encouragement" (i.e. beating back into line). If that's all true then I guess we might expect US$ to continue up for a while and oil will go a lot lower. I suppose the downside risk to all this though is that those pesky countries who are pro-gold might just use $ strength as a great opportunity to dump their US treasuries and buy more gold?

    1. Understand your conclusions but doubt the dollar is managed that well.

      Suspect it's more about interest rates as Dan has noted.

  4. Hi TraderDan

    About the Dollar index. If we project the width height of the channel upwards we are looking at around 92. There might still be more of this upmove to come

  5. Well king dollar might be a bit of a stretch,

    but the dollar is the strongest out of the 3 big bankrupt currencies, Japan, Europe and the US.

    For anyone believing the US is going to raise interest rates look no further than the single family housing starts chart,
    its been bouncing along the bottom for 6 years now and thats with these 0% interest rates.

    Imagine what would happen to housing if the Fed started to raise interest rates.

    Then take the massive national debt and consumer debts that are being financed at these historic low 0% interest rates and one has to say how can the Fed talk about raising interest rates in that type of environment.

    Probably only one reason they do is to not let the markets know they are trapped at 0% until there is a real recovery.

    And almost like clock work to stop the stock markets from falling the last few days, out comes Charles Evans from the Fed to talk more easy money for longer would be a good idea.

    Seems to be more a game of how long can the Fed fool the markets at this point.

    1. "Seems to be more a game of how long can the Fed fool the markets at this point."

      Uh, haven't people been saying that for about 10,000 Dow points now?

    2. Rates will go up but it'll be in very small increments which in effect will still keep rates low relative to previous historic "norms".

      I think the worry about the repayment of interest on the debt is greatly overblown. I don't dispute the math involved but I question the assumption that the US/Fed isn't going to shelf that debt with some type of slick (and legal) accounting move that more or less is written off or accounted for in some type of black ledger that isn't part of the public accounting of the Fed's books or activities.

      As long as they have the element of time on their side the more likely it is that certain assets or securities will never havr to be pid back or interest on them.
      If the US (through POMO) is slowly and steadyily buying up some of their own paper like it appears they have been in an increasing manner since 2009 then it seems possible that they wouldn't have to account or worry about paying themselves back so to speak.
      The more they buy and the longer they do so in a range of different maturities the longer they buy themselves time to slowly take those obligations off their books.

      That's how I see it. The US isn't the only country saddled with debt. Japan, the EU and many other countries around the world are saddled with debt they wish they could creatively account for in a different way that wouldn't trigger whispers of "defaults".
      But if everyone basically does the samething and they give the old "wink wink, nod nod" to each other I think it would work out.

      With the huge amount of asset and bond buying and other types of CB monetary operations going on in the US and elsewhere it seems to me they have a plan (future new financial laws and regulations) that will greatly absolve many of these countries of a portion of their debt that at this point in time seems insurmountable.

      What they need is time, lots of it, and a public with a short attention span.
      Given enough time (and the need and ability to write historic new financial laws and accounting principles) they will eventually weather through this period in time where the debt load and numbers involved (tens and tens of trillions) seem unworkable.

      Rates will go up but not in any quick or appreciable way. It's all about the optics.
      Just look at what the talk of tapering and QE has done to the market landscape since it was first mentioned.
      Just imagine what a token and miniscule rate hike will accomplish.

      The interest on the debt and rate hikes isn't the doomsday scenario it mathematically appears to be simply because TPTB won't allow it to happen if they can legislate or enact laws that can prevent it.

      Time is on their side....and so is the ability to create laws and enforce them or ignore them. Today's accounting standards won't be those of the future.
      It happens all the "time".

    3. Guess they have fooled you, unless you got in 5 or 10000 points ago.

      Not being able to raise interest rates off 0% and constantly stalling to do it does not tell you something might be a bit wrong?

    4. Wow Darkpurple, are you saying if you held thousands of dollars worth of treasury bonds in your retirement account that its ok to use some accounting trick to write it off and not pay you back?

    5. DPH
      Excellent scenario and quite likely close to the mark.

      There is no doubt a lot of things in the financial system are bad. Dan has detailed his take previously. DPH has just posited a scenario for how these things can be worked out without a currency crash. You might want to reconsider what he said.

      A much smarter person and better writer suggested exchanging a one note silver whistle for an instrument capable of a larger range.

    6. Wow Mike, you too don't mind if they write off trillions of dollars worth treasury bonds in peoples retirement accounts?

      If it was your treasury bond retirement account, you are saying no problem, write it off, you did not need that money anyway?

    7. Who exactly is "they"?
      If I'm "fooled" then you're implying that you know something for sure?

      Give it time. Sounds like you have a short time scale in mind.
      Nothing is imminent. In time you'll realize this or you'll deny it and keep saying it's only a matter of time before a collapse happens etc.

      I'm confident they'll figure out how to keep creatively kicking the proverbial can in directions most of us can't imagine presently.
      Lots of folks thought it would've, should've or could've collapsed 5 years ago, but it didn't.
      People thought the same thing about the great depression or many other banking panics that took place but it always worked out somehow.
      That's my point. Just because there's a couple or few extra zeroes attached to the end of various CB balances doesn't make it an unmanagaeable (through accounting miracles) situation in the future.
      I'm no fan of expanding CB balance sheets but I'm also not fearful of it because in the end there is nothing any if us can do about it. That's the frustrating part but only if you allow it to be.

      A trillion is the new billion in the same way several billion in debt used to freak people out when a billion seemed like a huge number, which it is.
      The US, China, Japan, EU etc. are all doing massive monetary operations in the trillions of dollars, yen, yuan or euro etc and if truth be known they've probably been doing it longer or more then it appears. The zeroes don't bother them.

      Rates will go up....just like the USD is doing when everyone was saying it was dead or on the verge of collapse etc.
      And now look at it.
      Nothing is imminent or impossible given time and short memories. Think in terms of a decade or two.
      We're halfway through a decade since the 2008-9 financial crisis. In another short 5 years we'll be ONE DECADE removed from what the shills proclaimed that we are close to collapse.

      It's to no one's economic benefit for many or all of the other leading economies to default or crash. They'll do whatever it takes to accomodate the zeroes of tomorrow that everyone else worries about today.

      Can kicking accounting 101.

    8. Barney...you're immediately assuming that bad scenario is going to play out right away in the here and now.
      The UST isn't going anywhere anytime soon.
      People have been worrying and warning of these things for decades upon decades...and they weren't right, they were wrong.

      There's a reason some countries are rolling out longer dated maturies with low rates so that they can continue to buy and cycle through each others debt like a merry go round of paper collateral.
      It buys them time.
      Plus, if the IMF (aka Washington) suggests or allows some type of debt relief in the form of allowing maturities to be extended out into the future then they'll have successfully navigated their way out of this current time frame into the future.

      They have lots of options with time playing an important part in that.
      Please don't respond....."They're out of time."

    9. Barneyb6
      Just to be clear neither I nor DPH suggested writing off T Bills or any other debt.

      That's your assumption.

  6. DXY FIB Zones offer 88-89 level , gold should see 1100 for sure, hence equities should see another move up before setting in correction.


  7. Not sure if Mike Maloney at Gold Silver has looked at the USD chart lately but today he's talking about hyperinflation again:


    My question is if the dollar breaks through .85 decisively what kind of short covering will this cause - any numbers on USD shorts?

    1. Elijah;

      There cannot be any hyperinflation without an increasing Velocity of Money and that is not present.

      Also, a strong currency and hyperinflation are the antithesis of each other.

      There are a lot of US dollar shorts that will be in trouble above 85. But the main thing is more the Euro and the Yen. both look weak. Also, note that the Aussie is very weak as well.

    2. How well does the Dollar Index track the underlying economy and movement of currency? We know that the Forex market is the largest and most liquid market there is. Is there a delay in global commerce realizing these changes in the Forex markets and if so, how long is the delay, 1 week, 1 month, 3 months, more?

      Is the velocity of money accounted for in the Dollar index?

      Lastly, don't forget that the index (or any currency pair) is a measurement of a currency versus another currency. So the potential is there to have 5 inflating currencies with a strong one in the mix relative to the others.

  8. If anyone is looking for gold positives, how about high yield corporate bonds threatening to break below their 200 sma. Last time that happened was in Aug 2011.

  9. Excellent analysis as usual.
    Dollar break out.
    Euro break down. I wonder if any of those near term support levels will hold.
    Mario Draghi and the rest must be a lot concerned about how fast it's fallen. Imports like Nat Gas getting real expensive this winter.

  10. Dan- thanks for the "excellent" commentary today.

    related to feeders defying gravity, take a look at the front month contract price difference between feeder cattle and live cattle. The spread between these two contracts is on a steady climb from the mid 20's to $75 since March - about the time corn prices started dropping. Eventually "what goes up must come down". Looking at a monthly chart difference, the mid 20's spread is more "normal" for these contracts. Maybe it will move back to normal when feed prices eventually go back up. But that's a $50 "premium".

    Can you post a COT on wheat next time you post one for corn (or if you decide to post one for corn)? if it is convenient... Would be interesting to compare the two. Thanks and good trading

    1. A $50 "corn is so damn cheap I can afford to pay up for feeder cattle" premium!

    2. Trinity;

      Yes, I will post a COT for Wheat next time around...

      I still marvel at how in the world anyone paying these insanely high prices for feeders is not going to lose his shirt.

    3. Dan- I do not know much about the cattle business but this isn't rocket science. perhaps you can shed some light on the following scenario:

      Cost of Feeder 600# X $2.30/lb = $1380
      $1/lb to fatten feeder to add 800# = $800
      Total cost = $2180
      Sell fed steer at $1.55/lb X 1400# (600 + 800) =$2170

      This results in $10 loss
      How does a cattleman justify paying $75/lb for feeders over fed cattle? Maybe the feed costs in the above calculation are "high". But even if they are lower, with the risks of keeping an animal for 7 months or so seems these economics do not add up. If so the feeder prices will have to drop relative to live cattle to "normalize" this price structure if these guys want to make money.

    4. trinity trader;
      What is taking place in the cattle markets is a great example of a hot fund money game. Funds like being long ( they will play both sides of a market but seem to prefer the long side ) and when they find a market that they can push, they will.

      They ALWAYS overdo things however. Cattle are an accident waiting to happen. The key will be the timing.

      People forget that the stronger the US Dollar becomes, the cheaper it becomes for the US to IMPORT foreign beef. And make no mistake about it; we will do just that as we price our US beef out of the global trade.

      For now however, it is one big money game.

    5. Cattle prices are being bid up again today. Another record for feeders. Compared to live cattle, the feeder contract are thinly traded. I suppose this can exacerbate the moves up or down and make it easier (as you mention) for the hedge funds to push it around. These kind of extremes make for some good opportunities that can get a trader's attention. As tight as the cattle supply is being reported, will be interesting to see if eventually it is a slow move down or more akin to a pin prick pop down....


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