Starting out with the chart that most suggests investors will be rushing to get liquid in the perceived safety of the world's reserve currency is the monthly chart of the dollar index UUP below.
It has yet to fulfill its very bullish Falling Wedge formed between 1998 and 2008 and a pattern that carries a target of about 120. What makes this pattern so interesting is the fact that it appears to be mimicking a similar pattern from the early- to mid-1980s that is shown in purple as do the smaller Falling Wedges of 2009 through May 2011 that look remarkably similar to the two Falling Wedges to follow the larger pattern in purple.
Should this comparison continue to hold true, it means that DXY will trade in some sort of a bullish consolidation pattern that may turn out to be an Ascending Triangle as occurred in 1995 and 1996 and as appears to be occurring now ahead of confirmation at about 90.
One reason to think the comparison will work beyond basic pattern repetition is shown by the overall Descending Trend Channel and the inner Descending Trend Channel. As can be seen, both pattern combos have been contained nicely by defined and descending levels of support and resistance and this provides reason to think that these levels will be respected in the future on both the upside and downside. Timing, however, appears to be the one small difference with the current pattern combo trading faster than the one from 1985 to 1998.
From the most practical standpoint availed by DXY's monthly chart, it appears to suggest that DXY may trade sideways between about 78 and 82 for another few months before potentially launching significantly higher on whatever that bullish pattern of consolidation turns out to be and toward the last small Falling Wedge's target of 89. In turn, this would free DXY to begin fulfilling the larger Falling Wedge with a target of 120.
All such potential trading would be consistent with an upside breakout of a large Symmetrical Triangle shown in previous notes frequently along any number of bottoming patterns to mark DXY's trading from about 2004 through today.
Were it not for the Fed's pledge to keep interest rates near zero through mid-2013, it would be possible to believe that a potential 13% move up to 90 or a seemingly outrageous 50% rise to 120 could come on the merits of an improving economy in the US, but it is challenging to make that case with interest rates near-zero in the context of that initial rise in the dollar index looking very likely for the next 3 to 12 months.
In turn, this suggests that this potentially significant rise in the dollar index will be driven by (1) investors rushing to get liquid ahead of a feared freeze in the credit markets akin to what started to occur in 2008, (2) investors rushing to get liquid ahead of a credit market freeze causing the financial markets to go illiquid except at a huge bid offer spread and thus at a huge loss potentially, and, (3) perhaps the unwind of a potentially huge shadow short UDNT in the dollar.
All three of those factors point to a worsening of the eurozone FXE sovereign debt crisis and a double dip recession but without going into the fundamentals too much here, let's turn to the risk asset charts that seem to suggest some sort of massive liquidation event is ahead.
Let's look first at equities through the monthly chart of the Dow Jones Industrial Average DIA.
One could make the case that it matches a truly massive liquidation event based on what would be the Head and Shoulders pattern of all Head and Shoulders patterns as marked in black and a pattern so extreme that its target is not so far above zero. Such a pattern is too extreme for my technical taste, but the pattern that does catch my eye is the smaller Head and Shoulders pattern in red that confirms around 10400 for a target of 7900 for a potential decline of 30% from current levels.
In turn, if the Dow Jones Industrial Average DIA were to fall 30% from current levels, it would certainly support the idea of investors getting liquid, but this point appears to be particularly true when the monthly chart of gold GLD is brought in and a chart that suggests big declines may be ahead for the yellow metal as was covered on September 16's Gold GLD to Fall By 50%.
For if gold did not look set to fall, this potential decline in the risk assets would be more aptly a flight to safety with investors seeking its sometimes safe-haven status. But gold looks set to drop to at least about $1,000 per ounce and this means the world will be trying to get out of stuff – investment assets – and into cash.
Gold's IAU monthly chart above shows the same bearish Rising Wedge presented in September and one that carries a target range of $680 to $1,045 per ounce, but now there's a decent difference: it is nearing confirmation.
Likely to confirm gold's IAU monthly bearish Rising Wedge is the large Symmetrical Triangle in its daily and weekly charts with a target of $1,400 per ounce and the bearish Pipe Top marked above with a target of $1,212 per ounce. Both of these aspects provide support for the idea that gold will confirm its bearish Rising Wedge relatively soon.
In short, gold IAU looks set to decline significantly in the same way that the Dow Jones Industrial Average looks set to decline with the combined picture of these two very different asset classes suggesting that investors are seeking liquidity rather than investment assets.
Let's confirm this picture, though, with just one last chart to make sure that investors are not shunning stocks and the precious metals for some other investment asset and this takes us to the chart of commodities DBA overall.
On the following page is a monthly chart of the CRB Index and, not surprisingly due to the nearly 18% precious metals component of it, it looks ready to drop by 30% to about 200.
Specifically, the CRB Index is trading in an extreme Diamond Top that is so extreme it doesn't have a target, but if it is viewed as a Head and Shoulders pattern, it carries roughly the same 200 target as the bearish Rising Wedge marked in.
What is interesting about that bearish target and perhaps the best technical reason to think that the flight to liquidity has begun already is the fact that the CRB Index's bearish Rising Wedge is very much fulfilling as can be seen.
In turn, it is the chart of the CRB Index with its fulfilling Rising Wedge that confirms the bearish messages of the charts of the Dow Jones Industrial Average and gold and the bullish message of the dollar index's chart, and thus the idea that a fast flight to liquidity looms.
Sam's Stash, Gold and the S&P
Truly interesting, though, is that the chart of the 10-year yield TLT nearly seems to underscore the idea that this could be a real flight to liquidity in the way that 2008 was not.
As can be seen in the chart above, the monthly chart of the 10-year yield TLT has been trading in a Descending Broadening Formation and one that suggests the 10-year yield may soon rise up toward 4.25% and something that would seem to support a rally is ahead for risk.
However, this is a monthly chart and so a move to 4.25% would take 12 to 36 months unless on an incredible spike up and something that will not come on a near-term rally in risk if the past remains a predictable guide while a slow rise could come on a long-term rally in risk or a continuation of the secular bull market that began back in March 2009, but the charts in the first section provide little support for it at this point after the damage done by the correction in August.
Should those assumptions prove true with the understanding that this analysis is outside of the mainstream, it means the chart of the 10-year yield is calling for a potential spike up as investors try to get truly liquid by starting to shun the safest investment asset in the world at this time.
And it would be this potential spike up in the 10-year yield TLT could make it difficult for the Fed to reinflate the financial system and the economy – again – as a fast flight to liquidity played out.
Thank you for taking the time to read this week's piece and have a great weekend.
Courtesy of Abigail F. Doolittle, Peak Theories Research
Posted with permission from author by Wall Street Sector Selector
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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