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ES Morning Update August 11th 2017

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ES Morning Update August 11th 2017

Well, so much for the ABC pattern up for the wave 2 as clearly that ended on Wednesdays' close.  The move down yesterday sure looked like a strong wave 3 too me, and today I think we'll see a wave 4 up happen and maybe even the wave 5 down to end the first larger A wave down (or larger wave 1?).  I'm seeing a possible FP on the SPY this morning that showed up afterhours yesterday just a little after 5pm.  It has a target of 245.05 and we might hit it right at the open from the looks of the premarket right now.  If so, and if we then rollover to go back down and make a lower low, then I think it will be the wave 4 up and wave 5 down to complete this first larger wave down.

After that I think we'll see an ABC up into Monday or Tuesday for the next larger wave, which is still unclear if it's going to be a series of 5 waves or 3 waves.  Right now I'm leaning toward 5 waves as I think the trend has changed to bearish.  If so, then the ABC up into early next week should be a larger wave 2 up and the larger wave 1 down should be complete today if we see another lower low hit at anytime between the open and close.  On the SPX there's a gap that needs filled from 7/11 that's just a hair under 2430, so I'd love to see that hit but let's think like SkyNet would for a second... what would fool the most sheep?  In my view if SkyNet knows that the trend has now changed it knows that this pullback is nowhere near done and only getting started.

So why not fool the sheep that see the gap fill level, who are surely waiting there to exit shorts and go long, by NOT hitting it on this smaller wave 5 down today to end the entire larger 5 wave pattern.  Then you can rally up next week for say a 50% retracement and then rollover again later in August to just blast past that gap fill and keep on heading south on the next bigger move down.  There no rule on when it gets filled, only that it usually does at some point in the future.  The bulls waiting to buy would miss the opportunity and the bears would still be short and failed to get out.  That's how I'd play it if I were SkyNet, so let's see how it actually happens.  Another thing is that "if" that gap isn't filled today then I personally think that is a clear signal that the trend has changed and that the low for this correction or pullback isn't in... therefore another deep move down is coming later this August or early September.

Anyway, for today I'm looking for a move up to the FP on the SPY of 245.05, to make the smaller wave 4 up, then down for a lower low for the smaller wave 5... thus ending the first larger wave 1 (or A) from the all time high last week.  The smaller wave 5 needs only to make a lower low by a penny in my opinion and does not need to fill the gap on the SPX Cash.  If this happens shortly after the open then I'd look for some midday rally up to start for the next ABC pattern of the larger wave 2 (or B) and that entire move should end by Monday or Tuesday, where I'd be looking to short again.  Have a great weekend everyone and keep all the great comments coming in the free chatroom as that's why I set it up... to share ideas and help each other.

ES Morning Update August 10th 2017

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ES Morning Update August 10th 2017

Yesterday was of course a pause day as the market got short term oversold from the tricky move down on Tuesday.  Now this morning we are down again but currently it's only a higher low.  There is positive divergence showing right now on the MACD's of this 60 minute chart, so that suggests we will make another lower low... but when is the question of course.  We should get a clue during the first hour or so of the day.  If they hold the low from yesterday then this move down could just be a B wave with yesterday starting an A wave up from that 2459 low.  Today it's really a tough call as I don't know the correct wave count and if the low breaks then we should be in a wave 3 down, and it could get ugly.  Yesterday's move up is likely a wave 2 up, but I'm not sure if it finished into the close yesterday or is sub-dividing into an ABC type wave 2 up.  Naturally the wave 1 down was from the Tuesday high to the Wednesday low.

Also, if you are wondering why I'm expecting a 5 wave move down instead of a 3 wave move (an ABC is typical for down moves when the market is in a bullish trend up), it's because I think we have put in an important top (not saying for sure that's it's "The Top" but an important one) and that the trend is changing.  So, I'm thinking we could have started a large A wave down (of a several month ABC down) that will breakdown into 5 waves.  I think we are currently in the wave 2 up of that large A wave down and it's unclear if it's complete or sub-dividing into a smaller set of ABC wave's.  But when it's done we should see the wave 3 down start of that larger A down.  Just based on the fact that we are near the end of the week I'm leaning toward a small ABC up for this wave 2 and the low from yesterday holding.  I say this based on my gut as I think they've woken up some bears and they don't want them to make any money.  So if they do the choppy ABC dancing into the close on Friday then they could put the bears to sleep again and start the wave 3 down of the larger A down next Monday when no one see's it coming.

It's just them being tricky and deceiving again, as they just don't ever want the bears to be positioned correctly when they drop the market.  The best way to do that is to tease them like what they are doing right now with the market about ready to open down over 10 points.  I'm sitting in cash right now as I want to let this play out.  If it breaks down then a wave 3 should be under way and I'll have missed it.  Then I'd look for the wave 4 up and 5 down to complete and maybe take a shot at a long on the larger B wave up.  But if my gut is right this wave 2 up will sub-divide and take its' choppy time until the close on Friday, where I'd look to short going into next week as everyone will be assuming it will be bullish because of it being the monthly options expiration week. However, that old statistic has likely changed since the introduction of the weeklies.

So while I'm not sure which case will play out I do think the trend has changed.  Only a new higher high would make that invalid, but it would have to do it quickly because the longer it takes for that move the more likely that it will be just another blow off top or exhaustion move as time is the enemy for the bulls now.  Many larger time frame charts are starting a slow turn from up to flat or flat to down, and that's a sign that a change in trend is coming very soon.  We may have already started it?  Don't know for sure but odds favor an important top being in already.  For today I'll likely just watch as I have no edge for what wave count will play out... only a gut feeling.  Again, if the low holds from yesterday then we should still be in the wave 2 up and its' just doing some kind of choppy smaller ABC up to frustrate the bears.  If the low is broken then we should be in the wave 3 down of the larger A down.  But a pierce of the low might just be a quick stop run, I'd want to see a real break to call that one a wave 3 down.

ES Morning Update August 9th 2017

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ES Morning Update August 9th 2017

Yesterday I suggested that the MACD's on the 60 minute chart of the SPX cash would turn back up probably on Wednesday or Thursday and we'd put in a double top or new higher high.  I estimated too much time on that turn and it did it all yesterday it seems.  After the new high we rolled over and started that 20+ point move down that I thought we'd see.  Now this morning we are down again and coming upon support from a green rising trendline and a horizontal support from a prior low on 7/27.

You can see resistance overhead from the falling blue trendline pointing to around 2470 by the close today, which I think will probably be the level they should pin the SPY at (that's 247.0)... but I see an afterhours "possible" FP showing 248.00 on the nose, and that might just be the signal that they plan to take it up there to that spot today by the close.  It doesn't me they will close it there but it could very well be a level they will hit at some point.  Maybe it's a fast early morning squeeze on the bears and then a move back down to close at 247?  I just don't know?

But anyone taking a short yesterday on that new high should probably exit around the open this morning as I'd say we'll put in a bottom within the first hour or so and then start up.  Looking at the SPY I see a premarket low of 246.07, so my guess is that level will be revisited early this morning and then we'll start going back up to either the FP of 248.00 or if it's not a real target and just a late fill... then I'd say we pin at 247.00 by the close.  That's a pretty simple road map for today... let's see how it plays out.

ES Morning Update August 8th 2017

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ES Morning Update August 8th 2017

The 60 minute (longer term) MACD on the SPX cash did curl back up just a hair at the close yesterday.  Now the two lines are touching and trying to turn bullish but haven't crossed quite yet.  The histogram bars went up from that -0.2 level to just a tiny bit under the zero level as I thought they would.  So while the futures chart shows no clear direction from a flat-lined MACD that just chops around the zero level the SPX cash is giving us some clues.  It tells me that a little bit more time is needed to get that bullish cross on its' MACD's and a move into positive terrority on its' histogram bars.  From a actually price level this move on the MACD's and histogram should produce a double top I'd think, or maybe a slightly higher high?  But it's looking like it's going to take 1-2 more days for that to happen, whereas then it will overbought with newly created negative divergence.

The shorter term MACD on the SPX cash is point up and already made its' bullish cross last week.  But it has multiple negative divergence on it already, so I don't expect it to go up really high like the prior peaks in the +5.0 - +5.5 levels.  With it around the +1.0 level right now I think what will happen is that it will rise to about +2.0 - +2.5 by Wednesday (or sooner) while the longer term MACD gets a bullish cross that just doesn't really turn up much... kinda goes sideways.  While all this happens we should see that grind higher continue to reach a double top or possibly a slightly higher high.  My guess again is that we'll end this by Wednesday's close or sooner.  That then suggests that we'll rollover on Thursday and/or into Friday and have a pullback of at least 20 SPX points.

The wildcard here is the Wednesday option expiration which might have too many calls up at the higher levels and force a pullback to pin the SPY at a lower level (like 247.0), and then resume the move back up early Thursday.  Another possible scenario is that we finish the move up early Wednesday (maybe a gap up?) and then rollover later in the day to again pin the SPY to make the most calls and puts expire worthless.  Overall though this market looks really determined to reach at least a double top this week, if not higher.  The futures are just being used to keep the cash from rolling over until they want them to... and reading the futures chart is worthless right now, which is why I'm looking at the cash too.  So that's my best guess on what should happen this week.  As for the small move down right now before the open in the futures, I don't make much of it.  Still looks choppy and range-bound too me, and that's problem all we'll see all day today I'd guess.  It's a rising channel on the SPX cash and it's going to reach an end soon... whether that's a new high or double top I just don't know.  But I don't see any signs this morning of a 20+ point drop coming.  Maybe one will show up by the close?  But I really think it will be later this week before we see that happen.

ES Morning Update August 7th 2017

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ES Morning Update August 7th 2017

Good Monday morning to everyone.  Not much to say this morning as the 60 minute charts shows no clear direction and the 6 hour chart has flat-lined on it's MACD's around the zero level.  We did see a 247.73 SPY high print this premarket morning so odds favor it being revisited today during normal hours at some point.  That's only about 3 points higher on the futures to the 2477 level or so, but that's something a daytrader can make a couple bucks off of I guess.  Even-though we don't see any clear direction today I still think we'll see some slightly higher high soon that can be shorted.  Call it a fast bear squeeze to a little closer to 2500 but I do think it's coming, and I still think it's a short.  Everything tells me we are in distribution mode as we've had way too many gaps up in the last month that keep getting sold into.  This is clearly the big boys trying to exit their longs a little bit at a time as the fall season soon approaches and that's where the bear comes out the most.

Looking at the SPX Cash Index the 60 minute chart is chopping sideways around zero on it's normal MACD settings but on a longer term MACD and Histogram setting there's clearly a slow struggle going on as the MACD's have fallen from +5 to about +2.5 and still can't turn back up from it's bearish cross back on 7/27.  The histogram bars were at -0.4 and have climbed back up to -0.2 right now.  What I think is going on is that the MACD is at that halfway point between it's high (+5.0) and the zero line where turns back up to make a lower high on it (and higher high in the market) commonly happen... but this time it's having a really hard time as the market is very overextended and up against some really tough resistance.  And, the histogram bars seem to need a little more time to work off the oversold conditions and become neutral... then we could start back down again.  My guess is that it will rise from its' current -0.2 level up to just about zero (but probably won't touch it) and then roll back down.  This is where we should see the market rollover as well.

Now, the "when" part?  Well, we all know that the old rules have changes since the introduction of the weekly options, so while in the old days we could count on putting in a low on the Thursday or Friday the week before the monthly options expiration (that would be this week), we can't rely on that pattern anymore.  Now we focus on open interest for the various strike prices on the SPY for every Wednesday and Friday weekly expiration as well as the regular monthly expiration.  That's what some of our traders in the chatroom have been doing and it seems to work fairly well.  For this coming Wednesday we have strong call resistance at 248.0 with put support around 246.0, so odds favor the market moving down to that level between Monday and Wednesday.  Then on Friday we have the 250 level having huge resistance on the call side, so again... odds say we will not close above 2500 at any point this week.  The put side is very open with not much support so far but that can change.  This tells me we actually could see a pullback this week where we put in a low (could be on Thurs/Fri like the old pattern?) and then see another attempt back up going into Friday, or next week (which is normally bullish) for the monthly options expiration.  All in all there's clearly a top in the making as there's just too many gap ups that get sold into for me to think this is consolidation before another 100+ point rally starts.

ES Morning Update August 4th 2017

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ES Morning Update August 4th 2017

Yesterday at the close when they dropped the market I had a gut feeling that was the signal that the NFP Report (non-farm payroll, now called employment situation) would rally the market up when released, and sure enough that's what is going on right now.  They pierced through the blue falling trendline a little as well, but they did NOT put in a new all time high.  So, with the numbers now out and the big spike up from it over with the momentum is fading and that's not a true sign of strength in my opinion.  If they wanted to take out the current high they really need to do it before the market opens while the volume is still low.  Failure to do so lowers the bulls' chances and means the inverted head and shoulders pattern I spoke of yesterday is likely going to be a failed patten.

Remember that the target on that pattern was around 2484, and that's a new all time high.  But all we have so far this morning is 2477.00, a lower high.  It wouldn't be so bad if when they open it would cause a short squeeze on the bears but odds say that most bears have their stops above the 2480 all time high and won't be forced to buy back their position unless that level is broken, which then of course we could see a short squeeze on them.  But below that level and the bears are just sitting tight and not panicking.  I would have liked to seen a fast squeeze up to 2484 and a reversal back down below 2480 before the open as that would be a great sign that they plan to take the market down.

Now we have to wait around all day to see if they hold this level, push up a little more or rollover.  There's really no good evidence to say that we'll drop at the open and reverse this move up as we didn't go up high enough to take out the bears and today is a Friday where they like to chop around all day to pin the SPY where the most options expire worthless.  I see no edge for the bulls or bears today as failure to take out the all time high before the open tells me they will have a very hard time doing it during market hours, which means they likely won't be able too... and a failure to run the bears stops tells me they won't drop it hard either.  Maybe the high is put in today, who knows?  But I don't see the start of the move down on a Friday, meaning we'll have to wait until next week I guess to see what SkyNet has planned for us sheep.  I'd love to be wrong and see a sharp reveral today at the open but I'm not seeing it as "likely", meaning low odds of it happening.  My best guess is that they will pin the SPY around 247.00, so that's a small pullback on the futures to about 2470.00... which is just more chop in a rangebound market.  Have a great weekend everyone.

ES Morning Update August 3rd 2017

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ES Morning Update August 3rd 2017

The market finally broke-down yesterday losing the red rising trendline of support.  Of course it rallied back hard as the bulls never seems to give up, but most bears now days expect that and take profits quickly and go back to sidelines to see what happens next.  Since I had that FP on the SPY showing 246.72 I exited my short once it hit.  It bounced and then went lower before the rally started to erase almost the entire move down, but that's to be expected when carving out a top.  There should be many more quick drops and fast recovery's before this ship really turns down south for a nice correction, but that's how works and there's nothing we can do about it but expect it and trade accordingly.

Anyway, this morning you can see the futures are trapped below the blue falling trendline of resistance.  The market actually came within a hair of hitting the line going into the close yesterday, then dropped afterhours and now it's back up there again.  I drew in a new light black rising trendline connecting yesterday's low with that afterhours/premarket low and you'll see a new triangle now formed.  There's also a case to support yesterday's low making a "head", then the afterhours/premarket low making the "right shoulder", with the "left shoulder" being the low on 8/1 that came back down to touch the red rising trendline.  This suggests another move up could happen with a breakout through the falling blue trendline of resistance.  My thoughts are that we'll chop around today inside that triangle and then we'll see the breakout to the upside for that "Head and Shoulder's Pattern" tomorrow... or we'll see a breakdown that takes us down to the 2450 area and below.

It's too early right now to guess but maybe we'll get some clues by the close today?  It's really a 50/50 guess at this point as the bearish count suggests we are a C wave down that started yesterday with the break of the red rising trendline and the bounce back up was just that C wave down dividing into more waves.  Most C waves are 5 wave patterns and we could have seen the wave 1 down yesterday and are in the wave 2 up right now.  It could also subdivide into some kind of small ABC pattern to complete the wave 2 up.  If accurate then the wave 3 down inside the C down should be a nice drop, and we should see it tomorrow or later today.  If wrong on the wave count then we'll have to give the ball back to the bulls and let them play-out their H&S Pattern, which would add about 10 points onto the 2474 area where it should breakthrough the blue falling trendline.  That would mean a new high of 2484 or so, and it would certainly scare out a lot of bears.  If the market wasn't manipulated so hard against bearish setups I'd put the odds in favor of the wave 3 down of a C down, but with the Fed's always sticking their funny money in the market I'm sticking with 50/50 odds on a breakout for the H&S Pattern or breakdown with the wave count.  For today though I fully expect it to dance in the triangle until the close and keep both bears and bulls guessing.

ES Morning Update August 2nd 2017

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ES Morning Update August 2nd 2017

Not much more to add that hasn't already been said.  The futures still look too me like they are in a B wave up from the A wave down low last Thursday around 2457, and this whole ABC pattern is either a wave 4 down with some wave 5 up yet to come... which would take us to new highs, or the high is already in and we are starting the next series of waves down.  Either wave a C wave down (which should hit the 2450 area of support) should be coming soon.  That red rising trendline has be saving the bulls all week but is should break soon.  We know the market is weak as Apple gained $10 afterhours from good earnings and the futures are barely up at all.  If this market was a strong one we'd have seen a bigger move up reflected in the futures of the S&P500 and Nasdaq for sure.  So while I'm expecting some more follow through on the upside for the futures today I'm not expecting much.

Afterhours in the DOW I saw a "possible" FP of 22,025 show up.  I say it's possible fake print as it could have been a reaction to Apple and therefore be a real print.  We know the bulls want to hit that magical 22,000 level so today would be a great day for them to do it.  Anyway, I still think it's a good idea to average into shorts here as the risk/reward of a big move up versus big move down seems heavily in favor of the bears here.  While I don't know if there's still going to be another new all time I do think there will be a pullback first... which could turn into a lot more and even mark the all time high already.  We just won't know until it first gets started moving down.  We could still get a little high and closer to 2500, like maybe 2485 I guess?  But again, the reward of the move down is greater then the risk of a huge move up in my view.

The American Empire and its Media

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The American Empire and its Media

Largely unbeknownst to the general public, many media executives and top journalists of almost all major U.S. news outlets, political and business magazines, public broadcasters and press agencies have long been members of the Council on Foreign Relations (CFR).

Established in 1921 as a private, bipartisan organization to “awaken America to its worldwide responsibilities”, the CFR and its close to 5000 elite members have for decades shaped U.S. foreign policy and public discourse about it. As one Council member famously explained, the goal has indeed been to establish an “empire”, albeit a “benevolent” one.

Based on official membership rosters, the following illustration for the first time depicts the extensive media network of the CFR and its two main international affiliate organizations: the Bilderberg Group (covering the U.S. and Europe) and the Trilateral Commission (covering North America, Europe and East Asia), both established by Council leaders to foster elite cooperation at the international level.cfr-media-network-hdb-spr.png (3781×2700)

In a column entitled “Ruling Class Journalists”, former Washington Post senior editor and ombudsman Richard Harwood once described the Council and its members approvingly as “the nearest thing we have to a ruling establishment in the United States”.

Harwood continued: “The membership of these journalists in the Council, however they may think of themselves, is an acknowledgment of their active and important role in public affairs and of their ascension into the American ruling class. They do not merely analyze and interpret foreign policy for the United States; they help make it. () They are part of that establishment whether they like it or not, sharing most of its values and world views.”

However, media personalities constitute only about five percent of the comprehensive CFR network. As the following illustration shows, key members of the private Council on Foreign Relations have included:

  • several U.S. Presidents and Vice Presidents of both parties;
  • almost all Secretaries of State, Defense, and the Treasury;
  • many high-ranking commanders of the U.S. military and NATO;
  • almost all National Security Advisors, CIA Directors, Ambassadors to the U.N., Chairs of the Federal Reserve, Presidents of the World Bank, and Directors of the National Economic Council;
  • some of the most influential Members of Congress (notably in foreign & security policy matters);
  • many top jounalists, media executives, and entertainment industry directors;
  • many prominent academics, especially in key fields such as Economics, International Relations, Political Science, History and Journalism;
  • many top executives of Wall Street, policy think tanks, universities, and NGOs;
  • as well as the key members of both the 9/11 Commission and the Warren Commission (JFK)

Eminent economist and Kennedy supporter, John K. Galbraith, confirmed the Council’s influence: “Those of us who had worked for the Kennedy election were tolerated in the government for that reason and had a say, but foreign policy was still with the Council on Foreign Relations people.”

And no less than John J. McCloy, the longtime chairman of the Council and advisor to nine U.S. presidents, told the New York Times about his time in Washington: “Whenever we needed a man we thumbed through the roll of the Council members and put through a call to New York.”cfr-american-empire-hdf-spr.png (5244×4054)

German news magazine Der Spiegel once described the CFR as the “most influential private institution of the United States and the Western world“ and a “politburo of capitalism”. Both the Roman-inspired logo of the Council (top right in the illustration above) as well as its slogan (ubique – omnipresent) appear to emphasize that ambition.

In his famous article about “The American Establishment”, political columnist Richard H. Rovere noted: “The directors of the CFR make up a sort of Presidium for that part of the Establishment that guides our destiny as a nation. () [I]t rarely fails to get one of its members, or at least one of its allies, into the White House. In fact, it generally is able to see to it that both nominees are men acceptable to it.”

Until recently, this assessment had indeed been justified. Thus, in 1993 former CFR director George H.W. Bush was followed by CFR member Bill Clinton, who in turn was followed by CFR “family member” George W. Bush. In 2008, CFR member John McCain lost against CFR candidate of choice, Barack Obama, who received the names of his entire Cabinet already one month prior to his election by CFR Senior Fellow (and Citigroup banker) Michael Froman. Froman later negotiated the TTP and TTIP free trade agreements, before returning to the CFR as a Distinguished Fellow.

It was not until the 2016 election that the Council couldn’t, apparently, prevail. At any rate, not yet.

References:

  1. Council on Foreign Relations:
  2. Bilderberg conference: participant lists 1954 to 2014 and 2015-2017
  3. Trilateral Commission: membership lists of 1973; 1978; 1985; 1995; 2010; and 2017
  4. Laurence H. Shoup (2015): Wall Street’s Think Tank: The Council on Foreign Relations and the Empire of Neoliberal Geopolitics, 1976-2014, Monthly Review Press
  5. Wikipedia pages about the CFR, the Bilderberg Group, and the Trilateral Commission

About the authors

Swiss Propaganda Research is an independent, academic research group focusing on geopolitical propaganda in Swiss and international media. You can contact us here.

ES Morning Update August 1st 2017

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ES Morning Update August 1st 2017

Yesterday into the close I posted a chart on the SPY in the chatroom that showed a smaller and larger triangle.  It rallied up to hit the top trendline of the smaller triangle the last thirty minutes of the day (around 247.20) and the last ten minutes we saw it fall back down to 246.77 to close below the lower part of that triangle.  I was just about to take a short thinking we were going to close near the top and missed it.  Now I'm glad I did as that too me was a classic move by SkyNet to lure in bears at the last minute and then turn back up after hours on the futures... which they did.  Now we have the larger triangle in play which points to around 247.75 on the SPY, and that around 2477 or so on the futures.  Guess where we are... within a hair of that target.

My thoughts on this are simple... it's a short.  We are so close to that 2500 level that everyone is now assuming it's "a given", and that's exactly when they pull the rug out from them.  Can it make a new high today?  Of course it can, but again I don't think it will be by much.  I don't see 2500 being hit but instead just getting up to within 10-15 points it and rolling over.  Since the prior high was 2480 we could pop through it a little and hit 2485 or but we could also just as easily stop under 2480 and just put in a lower high today, and that would suggest this is just a small B wave rally up with the A wave down ending at the 2457 low from last Thursday.  That leaves a C wave down to break that low (probably will find support in the 2450 area) and end this ABC move.

The other wave count would be a slightly higher high today, which then suggests last Thursdays move down was a wave 4 and we are in the wave 5 up today.  Once that ends then we should still start a move down (an ABC or 5 wave pattern?) that again should be testing the 2450 area at some point in the near future.  Put simply this is the perfect bull setup as a move down is very likely to start today or tomorrow... and that's only if they can hold it up all day today.  It's feat they are good at, so don't be surprised if it "holds the line" into the close and drops afterhours and into tomorrow.  I think it's 50/50 on dropping at the open or holding until the close but a pullback is coming very soon.  A touch of DOW 22,000 is probably another reason they are holding the market up.  So if we see that level hit then maybe we'll get the pullback started.

ES Morning Update July 31st 2017

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ES Morning Update July 31st 2017

Another month is almost here as we leave July today and enter August tomorrow.  We all know that mid-to-late August is a rough time for the bulls, so if they want to overtake 2500 they had better do it soon.  While only the insiders that control the market know when it will top out, and what level, but we do have some hope in timing it as we have past history patterns.  One important one is the "even number" play, where the market will get close to some big even number target (like 2500 in this example) but fall short.  Or it will pierce through it to wipe out the bears and lure in the bulls and then reverse back down.  Usually, I've noticed that when it fails it will get within 10-15 points and when it pierces it will go 15-20 points over it.  Right now we are very close to the "fail zone" so this week will be critical for the bulls I think.

From the looks of the various charts I think a whole week is need to work off the overbought conditions on the medium term.  The 60 minute chart (short term) is also becoming overbought but the 6 hour chart is neutral to oversold and hooking back up.  So we should see this rally up this morning hold and/or continue the rest of today at least.  But afterhours I'm guessing we'll see the 6 hour chart become overbought again that could lead to another move down starting on Tuesday.

Overall though if the bulls can just hold themselves in a trading range all week and not breakdown below prior support in the 2450 area they could reset the medium term charts enough to make another run at 2500 next week (possibly late this week?).  But it's not going to be easy for the bulls, as "holding the line" is going to be harder once momentum on the downside kicks it.  However, another move up seems likely as I currently do not see a good negative divergence setup on the MACD's of the daily chart of the SPX Index.  So while it appears to be rolling over on it's MACD's and it's Histogram bars are getting smaller and smaller, approach the zero line, that chart still tells me there will be another move back up after a pullback of some degree first.  It's just up to the bulls to keep that pullback to a minimum.

From an Elloittwave stand point it still looks like we had a wave 4 down start last Thursday from the 2480 high, and that while it could have ended as a one move wave pattern it's looking more likely that it's going to be a three wave pattern, aka... an ABC to complete the wave 4 down.  Currently (this morning) we appear to be in the B wave up part, which leaves the C wave down for Tuesday or maybe Wednesday. This all assumes we don't breakout through that 2480 prior high and make a run for 2500 as then the wave 4 down would have likely ended with the 2457 low.  And that would of course mean that we would have started the 5th wave up, but my gut tells me we have another wave down yet to come (the C wave of the wave 4 down) before we run up hard again for that 5th wave.

Now how high can it go you ask?  I wish I knew but I don't.  Obviously the next "even number" play is 2600 and then 2700, and while it's hard too believe they could get that high we still have a strong looking up trend on the monthly chart as I discussed in one of my morning updates last week.  Naturally it doesn't mean we couldn't experience some nice correction first, or even another flash crash, but once finished the market "could" still go higher... at least from a technical point of view.  With no negative divergence yet and no move under the various moving averages the market is still in an uptrend until proven otherwise.  I'll still be looking to short it when I see nice bearish setups (like C waves down) and will always be cautious on going long when so over extended, but I'm not getting stupidly bearish until I see some negative divergences and other bearish pattern setup.  For today... possible short into Tuesday by the close should the bulls not bust through the 2480 high.

Goldman wins patent for its own cryptocoin technology..what could go wrong?

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Goldman wins patent for its own cryptocoin technology..what could go wrong?

Goldman Sachs has clinched an important victory in its race to transition from a stodgy investment bank into a fintech powerhouse: it was awarded a patent for its proposed "SETLcoin" cryptocurrency settlement system, according to CoinDesk, the first to report on the patent.

“The US Patent and Trademark Office (USPTO) published Goldman's patent on July 11, entitled "Cryptographic currency for securities settlement". The bank made headlines when the existence of the patent application was revealed in late 2015.”

The concept envisions a system for settling securities trades using cryptocurrency instead of cash or other cash equivalents. When filed in December of 2015, the application notably outlined methods for exchanging SETLcoins for digitized stocks for firms like Google and Microsoft, as well as cryptocurrencies, naming bitcoin and litecoin in particular, as CoinDesk explains.

In its patent application, Goldman highlights the shortcomings of the clearing and settlement system, explaining how counterparties are forced to bear unnecessary risk during the period between when a trade is made and when it is settled, which can be up to three days for stock trades.

“The settlement of securities involves a process whereby securities or interests in securities (e.g., debt, equity, or derivative contracts) are delivered, usually against payment of money. A number of risks arise for the parties during the settlement interval that follows trading and precedes settlement. For example, after a trade for a security and before settlement, the rights of the purchaser are contractual and therefore personal; however, because such rights are merely personal, these rights are at risk in the event of the insolvency of the either counterparty to the trade. After settlement, the purchaser owns the securities, and the purchaser` rights are proprietary. Clearing involves modifying contractual obligations to facilitate settlement. Clearing houses, such as the National Securities Clearing Corporation (NSCC), provide clearing, settlement, risk management, central counterparty services, and a guarantee of completion for certain transactions (e.g., broker-to-broker trades, depositary receipts, and exchange-traded funds), and they serve as the central counterparty for trades in the U.S. securities markets. In the United States, the settlement date for marketable stocks can be an extended length of time--three business days after the trade is executed and for listed options and government securities it is usually one day after the execution.”

Then Goldman describes how cryptocurrencies like bitcoin work.

“A cryptographic currency is a digital medium of exchange that enables distributed, rapid, cryptographically secure, confirmed transactions for goods and/or services. One of the first cryptographic currencies to come to broad attention was Bitcoin, which is based on a peer-to-peer network, in 2009. Since then, numerous cryptographic currencies have become available, such as Litecoin, Novacoin, Namecoin, Feathercoin, Terracoin, Dogecoin, and Peercoin. Fundamentally, cryptographic currencies are specifications regarding the use of currency that seek to incorporate principles of cryptography (e.g., public-key cryptography) to implement a distributed and decentralized information economy. A digital currency, e.g., a bitcoin used in Bitcoin, is computationally brought into existence by an issuer (e.g., a bitcoin is "mined"). Digital currency can be stored in a virtual cryptographic wallet, (hereinafter "wallet"), i.e., a software and/or hardware technology to store cryptographic keys and cryptographic currency. Digital currency can be purchased (e.g., for U.S. dollars at an ATM or at an exchange), sold (e.g., for goods and/or services), traded, or exchanged for a different currency or cryptographic currency, for example. A sender makes a payment (or otherwise transfers ownership) of digital currency by broadcasting (e.g., in packets or other data structures) a transaction message to nodes on a peer-to-peer network. The transaction message includes the quantity of virtual currency changing ownership (e.g., 4 bitcoins) and the receiver's (i.e., the new owner's) public key-based address. Transaction messages are sent through the Internet, without the need to trust a third party, so settlements are extremely timely and efficient.”

...before providing a detailed description of how its SETLCoin system works, along with a summary of its most important innovation: the reduction in settlement times.

“The described technology concerns one or more methods, systems, apparatuses, and mediums storing processor-executable process steps to substantively instantly settle securities, based on cryptographic currency technology, without the risks associated with traditional settlement technologies.”

To be sure, Goldman knows what it is doing: a recent chart showing the blockchain ecosystem confirms that it is ripe for a major bank stepping in and profiting from the numerous "externalities":

According to Goldman, SETLCoin is a cryptocurrency that can be exchanged for financial securities over a peer-to-peer network, allowing trades to settle instantly because transfer of the SETLCoin is instant. Here’s how it will work:

“…SETLcoin wallet holds multiple positionable items (e.g., a security item, such as a share), herein referred to as a Positional Item inside Cryptographic currency (PIC), and a position (i.e., a quantity of the PIC represented by an SETLcoin wallet). A PIC is an agreed upon reference used by the peer-to-peer network to refer to, e.g., a particular security. For example, "IBM" (the stock market symbol of the company by the same name) can also be a PIC used by the peer-to-peer network to refer to IBM stock. A PIC, in some embodiments, is determined (and invalidated) by an issuer. An issuer (e.g., a company, underwriter, municipality, government, etc.) can have multiple PICS to represent different types of securities. For example, IBM stocks can be represented by PIC "IBM-S" and IBM bonds by PIC "IBM-B". In some embodiments, PICS are issued (and destroyed) by highly authoritative entities. For example, dollars available on the SETLcoin network represented by, e.g., PIC "USD" may be authoritatively issued by, for example, the U.S. Treasury. However, the described technology can issue PICS based on various other techniques (e.g., network node agreement, exchange regulation, lease or purchase, auction, etc.) and can be named based on, e.g., a company's name, its market symbol, its branding, its security name, availability, or a preferred format (e.g., length, abbreviation, etc.).

An SETLcoin wallet or transaction can house a single security, as described above, or multiple denominations of the same security (e.g., 1 IBM-S SETLcoin valued at 100 IBM shares). SETLcoin wallets or transactions may also house multiple securities (e.g., 1 IBM-S SETLcoin and 2 GOOG-S SETLcoins). SETLcoins are exchangeable for, e.g., other SETLcoins and/or other cryptographic currencies (e.g., peercoins). For example, a single IBM-S SETLcoin may be exchangeable for one or more "GOOG" SETLcoins (i.e., Google shares), for 13,000 USD SETLcoins, 100 litecoins, and/or for 5 bitcoins.”

It is unclear if and how Goldman's foray into blockchain will impact prices of existing tokens. You can read the whole patent here.

Lest we not forget that this "new world currency" was foretold back in 1988 on the cover of "The Economist" magazine.

Do you every wonder how that cover with that coin looks so similar to BitCoin today?  I mean, how could anyone have thought about "mining coins" when there wasn't even an internet back then?

It's so bizarre to think about and scary to look at that coin and how accurate it looks that you'll have to think someone planned it many, many years ago (or had a time machine... LOL).  So, tell me how you are going to get people to accept this new currency?  I'd have to say that the only way possible is to crash the stock market so hard that people will be begging for help from the government in any form of money they will give them... and of course 2018 is just around the corner now.

So, if I were "them" I'd start with a stock market crash this year... as in October of 2017 or so.  Then I'd carry it into all of 2018 so that by the time the year ended we'd see half or more of the market erased.  A scare like that would make so many innocent people lose most or all of their 401k money that they would accept this new digital money.

Remember that the government has already got a system of money in placed called SDR's (Special Drawing Rights) that is supposed to be backed up with a basket of currencies.  Now I don't know if that will be the new money  or not, but certainly we are going to become a lot more digital after 2018.

It's always been my belief that "they" (as in the rulers of the world... the elite) let BitCoin (and other Crypto-currencies) get started and accepted by the public as they wanted everyone to get used to a digital system of money.  In fact it wouldn't surprise me if "they" didn't fund the creation of it and trick the public into thinking they were safer to stop using the US Dollar and go to BitCoin.

It's the biggest trick of all... tell everyone that hates the elite and what they've done to make the dollar almost worthless (in buying power) that there is a way to bypass "them" by switching to a new digital currency called "BitCoin".  They even let the stock price soar to record highs.  Then when everyone is "ok" with digital money they create their own through one of their satan run banks... aka, Goldman Sachs (GS).

Next would be to start taxing all other digital money except the GS Coins so that people will abandon BitCoin for their new money.  It's coming folks... and it's been a multi-decade plan by "them" that so far is playing out just like they expected.

Red.

ES Morning Update July 28th 2017

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ES Morning Update July 28th 2017

Finally... we got a nice move down.  Of course it took most everyone by surprise (including me), but it was way overdue and much needed.  Now we can look at this 60 minute chart of the ES Futures and see how nicely the rising red trendline held the market on the move down yesterday and is still supporting the market this morning.  I discussed yesterday in the free chatroom that this move down looked like it might be a wave 4 of some degree and that we might still have a wave 5 up yet to come... which should end this rally on a bigger scale and allow for a 2-3 correction/crash.  I still think that is the case and I think we'll have the best odds of that 5th wave ending on Monday or Tuesday of next week.  Now whether it makes a new all time high again or becomes a "failed fifth"... meaning a lower high, I don't know.  Considering how long this move up has been going on I'd have to think they will "eke" out a new all high, even if it's just by a few points.

My thoughts for today are that we'll ride this red rising trendline of support all day with some attempts at a rally but I don't see the new all time high today.  Most likely the bulls will get stop at the bounce high area yesterday, which was about 2473 or so.  I do think they will get past that level but today looks a lot more like a rangebound day, riding the trendline higher but not making too much headway on the upside.  If we are indeed in a small 5th wave up from yesterday's low then it too could breakdown into 5 tiny waves of its' own.  And that would suggest the first tiny wave 1 up happened from the 2457 low yesterday and ended at the 2473 high.  Then the afterhours drop is the tiny wave 2 down, and it's trying to reset the short term charts so the tiny wave 3 up can start.  I just don't think that "tiny wave 3" will start today.  Kinda a gut feeling based on past times that I've watched Friday's do a whole lot of nothing after a nice move down on Thursday happen.  Anyway, I'll keep today's update short and end it with wishing you a fun weekend as I suspect the fireworks will start next week.

ES Morning Update July 27th 2017

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ES Morning Update July 27th 2017

Man, this market is really running on fume!  Correction... it's out of fuel and just gliding!  Various charts I look at, from the SPX Cash Index to the ES Futures (in different time frames), all signal the same thing... "ready to drop".  The futures are up a little this morning but I'd really be shocked if today closes positive.  Everything points to a move down today, but I guess that's hard too "make happen" if sellers don't show up and hit the sell button.  We are certainly up in "nose bleed" altitude right now.  I'd think there would be some selling as the big funds shuffle positions around the last 3 days of the month, but so far there's been nothing.

However, we all know the game the Fed's play these days... which is that they hold the market in place for several days after the FOMC meeting as they don't want blamed for any market turn from what they said.  But a few days later the market can turn and the media blames it on something else.  So maybe the Fed's hold this pig up until Friday, I just don't know?  But it's very bearish looking today and I just think that with every day that goes by they are setting the market up for a bigger fall.

Maybe it's the SPX daily chart as that's the only one I can find that isn't bearish yet but instead just now peaking and trying to roll the MACD's over.  On it we have a MACD at 11.5 and one at 9.3, and the gap between them has been much wider then take... meaning the higher one is losing steam and curling over.  On that chart we could see another 2-3 days of chop before the upper MACD crosses over the lower one and gives us the bearish cross.  Of course this could happen all in one day if there's a surprise move down of 20 or more points.

The weekly chart is still up in the clouds and very overbought hanging around +30 or so.  The peak on it was back in early March of this year with a +46 and +39, but that all changed by late March as they crossed over and gave us the bearish cross that's been swinging back and forth ever since then.  The monthly chart is still pointing up strongly with no signs of a cross yet, or even a turn back down.  But both the weekly and monthly charts are too long a time frame to forecast the future.  By the time they turn down the move will have already happened.  Nevertheless, they are worth looking at from time to time so we can get the big picture... and it tells me that we are overdue for a correction on the weekly and daily but still in bullish mode long term.  That's at least until we see the depth of the correction.

The month chart is again "not something" you can use to forecast the future.  Once a bearish cross is made on its' MACD's that seems to be all she wrote for the high as it's not revisited with a higher high until many years later.  For example, in August of 1999 the monthly MACD's made a bearish cross, but the high in the market didn't come until March of 2000.  All this time the MACD stayed bearish with a couple of attempts to get back to positive but look about equal in their levels as opposed to a real bullish cross.  That tells me it's "possible" that we could have a small pullback (like in July to September of 1999... percentage wise I mean) and make the bearish cross, but continue high into early 2018 before topping.  But there was no point at which the MACD's turned back bullish until the crash was over with in late 2002.

Now when we look at the bearish cross on October of 2007 we see that the top was also put in as well at the same time.  Then the bearish cross again did not turn bullish until after the crash end and the market turned back up strongly (June of 2009).  This tells me that whenever we finally get a bearish cross on the monthly MACD's there's strong odds that a top is either already put in or will be so within 6 months of the turn, and that we've entered the next bear market.  All of this information suggest too me that we are ready for a correction to start but 50/50 on whether we've entered a bear market.  We'll have to see the depth of the correction and what it does to the month MACD's.  If they cross then we know the bull market is likely ended or within 6 months of ending.  For today though, I'm guessing it's going to be another "keep your fingers and toes in the damn holes Janet" day... meaning the Fed's don't look ready to let this correction start yet.  Maybe tomorrow, but my bet is next week it starts.  Inching into some shorts here today and over the next several days might be a good idea.

American company microchips employees with device the size of a grain of rice

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American company microchips employees with device the size of a grain of rice

American company microchips employees with device the size of a grain of rice

A US company is microchipping its employees to enable them more convenient access to workplace amenities.

The Wisconsin company -  Three Square Market – designs software for break room markets that are commonly found in office complexes.

Now ABC News reports just as people can purchase items at the market using phones, Three Square Market wants to do the same using a microchip implanted inside a person’s hand.

Todd Westby, Three Square Market CEO, said: "It's the next thing that's inevitably going to happen, and we want to be a part of it.”

More than 50 employees have volunteered to have the devices implanted with a chip that is about the size of a single grain of rice.

Along with purchasing market kiosk items, employees will be able to use the chip to enter the building via the front door and log onto their computers.

The chip – which costs $300 and is currently being paid for by the company – is implanted between a person’s thumb and forefinger.

Westby assured ABC News the chip does not use GPS tracking and the data is both encrypted and secure.

No one who works at Three Square Market is required to get the chip implant.

ES Morning Update July 26th 2017

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ES Morning Update July 26th 2017

Still grinding higher a little each day it seems.  Today is the FOMC day so we might see some action after the minutes but lately the Fed days aren't much to write home about.  Everything they say is already expected to be said and everyone knows it.  So unless they say something no one is expecting it might be another boring day.  I'm still looking for a little higher though, like within 10-15 points of 2500 (or 15-20 over 2500... but not 2500 on the nose).  As far as charts go, we are overbought and have negative divergences everywhere.  But that doesn't matter when the market is waiting on news I guess.

My thoughts are that we'll continue this action until Friday where we could see the last important top before a correction starts.  Meaning that we could top today, drop small on Thursday and back up on Friday for a double top, lower high or maybe even a higher high... but next week I think we'll see some action start on the downside.  Of course it will be choppy but the moves down and back up should be larger.  This 5-10 point daily moves should be replaced with 20+ point days, both down and up as both bulls and bears get shaken.  We should test the 2450 area on the down move and then bounce some, but a move down is coming... and soon.  For today I'm just watching to see if the bulls can get an exhaustion move up where I can short it.  Maybe that will happen on Friday after a pullback tomorrow of 20 or more points?  Don't know but we are close to a top and I'm a patient bear.

ES Morning Update July 25th 2017

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ES Morning Update July 25th 2017

Nice turn back up afterhours and premarket.  We knew it was coming from the look of the 6 hour MACD, but I kinda wasn't expecting it until Wednesday around 2pm from some FOMC announcement.  Now I'm beginning to wonder if we don't top out on Wednesday as this clearly looks like a 5th wave up.  Maybe there's one more push higher after something positive the Fed's say?  I don't know for sure?  But this market is setting up for a pullback very soon.   There's not only the wave count but there's negative divergences setting up too.  Then there's the month of August which known to be a bull killer... especially the 2nd half of it.  All in all the odds favor a correction coming very soon, and I'm thinking it could start as soon as the FOMC meeting is over with.  Anyway, not much more to add this mornings update so I'll end now and keep it short.

ES Morning Update July 24th 2017

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ES Morning Update July 24th 2017

Good Monday morning everyone.  The 60 minute chart here of the ES Futures is looking oversold and acting like it wants to go up.  The 6 hour chart (not shown) is starting to form a nice hook back up on its' MACD's too, so another move higher is likely still in play.  But, we have another FOMC meeting this week so we will probably see some choppy action until 2pm Wednesday when the minutes are released.  Overall though the pullback we've had looks like a wave 4 (starting from the 7/6 low of 2405), which might drift a little lower until Wednesday.  I'm not expecting anything big of course as odd favor it to be another "wait and see" Monday-Wednesday until the FOMC meeting is over with.  It's crazy how dependent the market has become on the words spoken by the Fed's but it's just how things work in this new trading era I guess.

My thoughts for today... a whole lot of nothing.  If this 60 minute chart can get turned back up I still don't think it has the strength today to take out the current all time high.  If we drop then the 2455-2460 area should hold the bears in place as it's great support on a low volume day, which is what I expect again to happen just like all the recent days over the last several months.  It's really crazy and scary when you think about how low the volume has fell over the last year or so.  For the SPY we used too consider 70-80 million shares traded an extreme low, but now they commonly go under 50 million shares.  There's very few humans trading I guess as it appears to be robot's versus robot's (rock'em sock'em robot's... LOL).  I read a statistic over a year ago that said 84% of all trading is just bot's.  Pretty scary as they take the human fact out of the picture and will just sell, sell, sell, as they are programmed to do... if and "when" the crap hits the fan.  Anyway, I's just relax today I don't see much going on.

ES Morning Update July 21st 2017

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ES Morning Update July 21st 2017

A whole lot of nothing yesterday, at least by the close.  There was a slight pullback in the morning but it got bought up by the close.  Today is the monthly options expiration so we could see a little more movement as the market makers will want to pin the SPY where it hurts the most... which I believe is lower this time around.  Just looking at the SPY chart there's a lot of sideways chop in the 245.50 area, so that could be the best pin spot.  On the futures that would be around 2455 I think.

Looking at this futures chart you'll see I moved the rising blue trendline over from where it previously was (and was broken) to the current position where it has three touches of support.  This morning we see that it's piercing through it a little and down a few points.  It looks to me like a backtest of the low from yesterday is plan for the day.  But if yesterdays move down to that low was just some kind of small A wave, and the move up into the close was a small B wave, then today's move down should be a small C wave... which should go lower then yesterdays low.  And if so, then the target that would make sense is the 2455 area where there's prior sideways movement (support).  If that breaks then the 2445 area would be the next support zone.  But I don't think they will drop that much on a Friday, or if they do they won't close it that low.

This whole ABC down from yesterday is probably some wave 4 pullback that leaves a wave 5 up yet to come.  This wave 5 up should start Monday and might also breakdown into 5 smaller waves.  I think it's target will be the 2500 level, but I don't think it will make it there.  I think we'll get within 10-15 points of it and that's all she wrote for the bulls.  Anyway, for today I'm looking for a move down to pin the SPY where it makes the most options expire worthless.  My guess is that's it's between 245.50 and 246.50, which isnt' much to go on but a good day trader could play it.  Have a good weekend everyone and thanks again for all the great comments from everyone in the chatroom.

Last week the Fed raised the white flag on further rate hikes. There won’t be any for the foreseeable future.

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Last week the Fed raised the white flag on further rate hikes. There won’t be any for the foreseeable future.

No rate hikes are coming at the July, September or November Fed FOMC meetings. The earliest rate hike might be at the December 13, 2017 FOMC meeting, but even that has a less than 50% probability as of today. I’ll update those probabilities using my proprietary models in the weeks and months ahead.

The white flag of surrender came in two public comments by two of the only four FOMC members whose opinions really count. The four voting members of the FOMC worth listening to are Janet Yellen, Stan Fischer, Bill Dudley and Lael Brainard.

Yellen and Brainard made public remarks last week. Yellen’s testimony before Congress received the usual saturation coverage. Brainard’s remarks to an academic conference at Columbia University received far less coverage, but were perhaps far more important in terms of the impact of Fed policy on markets including gold.

These comments by the two FOMC members should be put in the context of my model forecast for Fed behavior. I expect the Fed to raise rates 0.25% at FOMC meetings every March, June, September and December from now until mid-2019 until the Fed’s policy rate reaches a “normalized” level of 3.25%.

However, the Fed will “pause” in these rate hikes when if seek weak job creation (below 75,000 jobs per month), persistent disinflation, or a disorderly stock market decline of more than 5%. Absent those pause factors, the Fed is on auto-pilot to raise rates.

The Fed will also reduce its balance sheet starting this September at a level of $10 billion per month, ramping up to $50 billion per month, until the balance sheet is “normalized” at about $2.5 trillion (down from over $4 trillion today).

The balance sheet reduction is intended to “run on background” and will not be dialed-up or dialed-down as a policy tool. Balance sheet normalization is a “set it, and forget it” tool that will not be subject to the pause factors.

That’s the baseline for normalization. Now for the exceptions. If I am forecasting no rate hike in September, which pause factor applies?

The answer is disinflation. The Fed’s preferred metric for inflation is the Core PCE price deflator year-over-year. The Fed’s goal for this metric is 2%.

Here’s the actual data:

February 1.8%

March 1.6%

April 1.5%

May 1.4%

The June data has not yet been released. However, June data was released for a similar measure, which is Core PPI year-over-year. That measure was 2.1% in May and 2.0% in June.

Taken together, this data shows that disinflation is strong, the Fed is moving further away from its goals, and the trend is not transitory. That’s what Yellen publicly acknowledged on July 13, and that’s why she threw in the towel on a September rate hike.

Brainard’s July 11 speech was much more technical than Yellen’s testimony and more interesting. She made it clear she would not vote for a rate hike in September. Brainard said much the same thing in an earlier speech on May 30, 2017 in New York, but the July 11 speech put the last nail in the coffin of a rate hike.

But, the July 11 speech spent far more time on the difference between rate hikes and balance sheet reduction as forms of normalization. Brainard recognized that both forms of normalization constitute monetary tightening and have the potential to make the dollar stronger, weaken other currencies, and create international “spillover” effects including capital outflows and market crashes in our trading partners and emerging markets.

These kind of spillovers were seen in May 2013 (the taper tantrum), August 2015 (the China shock devaluation and U.S. market crash), and January 2016 (the China stealth devaluation and another U.S. market crash). Brainard understands the importance of avoiding international spillovers as the Fed goes about the business of tightening.

Brainard took the view that balance sheet reductions have a much smaller impact on exchange rates than interest rates hikes. She also took the view that one is a substitute for the other in terms of normalization. Therefore, when economic conditions are weak, as they are now, the Fed could continue balance sheet reductions, but pause on rate hikes to continue normalization while minimizing foreign exchange spillovers.

Brainard bases this view on something called the “interest rate parity” theory that says changes in short-term rates (those affected by the Fed policy rate) are a stronger determinant of exchange rates than intermediate term rates (those affect by balance sheet reductions).

The problem, as usual, is that the Fed’s theories bear no relation to reality.

Interest rate parity is an old idea that has little or no explanatory power today. I first learned it in the 1970s shortly after the end of fixed-exchange rates. Exchange rates today are driven by capital flows, which are driven by investor perceptions across a range of indicators that include all forms of Fed normalization.

The result of applying an obsolete theory will be an economic crack-up, probably in the form of a recession. This will produce a 20% decline in stock prices at best, and possibly a 30% market crash before the end of the year. This will be caused by Fed tightening (whether by the policy rate or balance sheet reductions) into weakness.

First quarter GDP growth was 1.4%, Second quarter growth is currently estimated by the Atlanta Fed at 2.4%. (That 2.4% estimate was down from the May 1 estimate of 4.3%, and the June 13 estimate of 3.0%; another clear sign of economic slowing).

If the second quarter is reported at at 2.4% level, it would put first-half GDP at 1.9%, which is lower than the historically weak 2.03% average annual growth since the end of the last recession in June 2009.

In short, growth is weak, inflation is weak, retail sales and real incomes are weak, labor force participation is low and stocks are at all-time highs. Brainard and Yellen made it clear that the Fed will continue to tighten through balance sheet reductions even if rate hikes are on hold.

Tight money, a weak economy, and a stock market bubble is a classic recipe for a stock market crash. It’s time for investors to go into a defensive crouch by selling stocks and reallocating assets to cash, Treasury notes, gold and gold mining shares.

In particular, gold will be the big winner when the Fed suddenly realizes its blunder and has to pivot quickly to ease, probably by late summer. The time to position in gold is right now.”

Regards,

http://2.bp.blogspot.com/-hKVMNMEQZHA/UzB0APtMl9I/AAAAAAAABfA/DmaerwdbN14/s1600/James+Rickards.jpg

Jim Rickards
for The Daily Reckoning

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