OPEX WEEK BEGINS – ALL ABOUT USD

It seems clear that one way or the other we are likely to see an important interim top for equities in the next few days. The question is where do we top and when?

The only three of the major indices to bounce cleanly off the trendlines of their respective expanding wedges at the last equities swing low were the Dow, USD and the Vix, so it is reasonable to regard them as the lead indices on the way back. First the Dow:

The Dow touched the upper trendline of the broadening ascending wedge cleanly and bounced off it. It also hit the 50% retracement for the bear market. RSI and MACD confirmed. It has hit the (rising) trendline again this morning, and as I write is poking through it looking to the upper trendline of the rising wedge at 10,450.

USD has returned part way to the other side of the USD broadening descending wedge and and retested the broken falling wedge upper trendline It failed that retest and bounced off. If it does not return that will be a strong signal that the broadening descending wedge is about to play out, with a target at 81. It has weakened over the weekend. but is still a comfortable distance away from making a new low.

The Vix has returned part way to the other side of the Vix broadening bottom. The Vix retested the broken falling wedge trendline and broke back into the falling wedge. It then bounced off support at another significant trendline. Again, if it does not return that will be a strong signal that the broadening bottom is about to play out, with a target at 44. The Vix has not dropped significantly this morning.

There is a significant danger with both USD & Vix however that these bounces have merely been a pause on the way down. More on that later.

Gold is also in a broadening ascending wedge. Again it has touched the upper trendline and appears to be on the way back down. That may not be significant for equities, but is indicative that USD may well have made at least an interim bottom. :

Dow and Gold at least therefore appear to be very close to a top. Dow has touched the 50% fib retracement of the bear market. The SPX has not yet touched  the SPX 50% fib at 1121, but as it broke the lower trendline of the broadening ascending wedge on the last swing down, and has noticeably lagged the Dow since, there is no reason to think that it should.

In terms of the topping range closes that have been characteristic of every significant top since May, SPX closed for the fifth day in a narrow range on Friday. The longest series of these closes before resolving down was in June at ten days, but at five days we are ready to start downwards at any time now:

The last three months at opex have followed a clear pattern of topping at opex and starting down afterwards. I was mapping a chart of a series of four week cycles in 2009 with significant turns nearby, including all three recent interim tops. This is a particularly interesting chart as it has marked almost every significant top in 2009, as well as the bottom in March. I noticed that it coincided with opex for the last three months, and is now a week ahead as there has been a five week gap between opex Fridays this time. On this chart therefore, there is no need to wait until opex before significant declines can begin:

To summarise, the Dow,  which is demonstrably the lead equities index here, appears to be topping. USD and Vix have reversed well short of their targets and unless they reverse again towards those targets USD and Vix both look poised for a very significant rally. They seem very unlikely to return to those targets, because to do so, Dow would need to substantially overthrow the upper trendline of its broadening expanding wedge, which none of the equities indices have done so far before, and to the contrary all of the other equities indices apear to be breaking downwards rather than upwards.

However there is an outlier bullish scenario here, and it is worth bearing in mind. In large part this equities rally is all about the declining USD, which has lost some of the ground gained since the interim bottom was made last week. If USD should make a new low in this current downswing, then the bounce off support last week may just have been a bounce on the way to the lower wedge trendline support at 74. In that event I would expect the Vix to go towards broadening bottom support at 19, and the Dow would be very likely to break through the upper trendline of its broadening ascending wedge as both USD and Vix fell. In that event the USD and Vix bounce that we saw last week would not have been a signal of a significant bearish reversal, but instead a signal of a significant bullish continuation and acceleration.

In that event, there would be a significant possibility of the SPX returning to its upper broadening ascending wedge trendline at 1135, or even to overthrow it. As soon as USD made a new low I would cut all short positions and wait for the situation to clarify. I don’t think that this scenario is likely from here, but this is opex week, and strange things can happen sometimes in opex week.

As I write, the SPX futs have hit 1109. I am cautiously adding to shorts at this level. Unless we see a new low on USD I think we are unlikely to see the SPX close any higher than 1110, and if we reach 1115 I will be 75% short until this resolves downwards, or the USD makes a new low. It may be that we will not start the next downswing in earnest before opex this Friday, but I won’t be waiting as the topping process may not last as long as that. My initial SPX target for this next downswing is 1040, and I think we are likely to hit it. I’d rather risk being a bit early than miss the +70 I believe is already available on this swing.

If USD and Vix are indeed breaking up out of their patterns, the Dow would most likely break down out of the broadening ascending wedge as the other equity indices have already done. If so, then we are most likely looking at a much deeper equities correction in the context of a significant USD rally. The target of the USD broadening descending wedge is 81, and it would then be worth keeping short positions open until USD reaches at least 80 IMO.

If USD makes a new low this week though, then all bets are off until USD reaches the next support at 74.

Good luck everyone!