TRUST BUT VERIFY
I read something the other day promoting putting some of your money into the YUAN as a safeguard against a collapse in the US. This did not sound like such a bad idea just on the surface, so just for kicks I pulled up the currency pair of the US to the YUAN. You can see the dramatic move that has taken place here, with the YUAN appreciating rapidly against the dollar. Some of the promoters of this idea claim there is very little downside and likely quite a bit of upside, REALLY? Where were they 10 years ago when this move started?
This bet is basically shorting this pair right here. Now there is absolutely no question that by any measure the trend is down here. I certainly could not tell anyone in good conscience to buy here. However, if you look at this closely what you see is that we are at a seasonal low spot, and there is a ton of divergence in the ADX index. In a strong trend, the ADX should be increasing. It did for most of this recent downward move but recently it has not confirmed the recent action. If we pair that with the fact that we are incredibly extended in this direction already and in a zone where a reversion is a mathematical certainty, does it make sense to initiate a position here?
This is another example of trust but verify. On the surface this seems like a good idea, or does it? We know there is spiking inflation in China, the very condition the doomsayers claim is the reason we are headed for trouble in the US. Wouldn't a move into their currency now be the equivalent of moving into ours once our inflation wave starts? In other words right when it hits the fan, you are chasing the currency. The theory for the US is that the FED will continue to devalue to dollar to fight the inflation. Why wouldn't the Chinese do the same thing? Folks if they do this will move in the opposite direction of what you would want if you were to make this move.
There is a consistent theme to many of these types of ideas. This is the same trade essentially as buying the GOLD market here. The move could continue but has already had an historic run. This is akin to having shorted the SP 500 when it was under 700 due to larger picture views that we had problems coming. The move had already happened! How would that trade have turned out with the SP 500 now at almost 1300? It is amazing how the "experts" always come in after the fact right at the end of the move and get everyone loaded on the wrong side right at the turning points.
I don't know about you, but it will be a cold day in hell when I short a move like this in the above chart at this point, very cold. Sometimes we all get tied up in making things too complicated. Just knowing the cyclical nature of life, does it make good common sense to wait for something to move an extreme amount in one direction, then betting on the move continuing? If you are of the mindset that reversions never happen, by all means go ahead. However, you should keep in mind that reversions to the mean are not ideas, they are statistical facts. They happen period. It is not always easy to time them, but in a situation like this you are basically in a 90% + probability of a reversion of some type upward. If you are inclined to take on this strategy of putting your money into the YUAN, wait for some type of correction first.
Readers here know I have been bearish on Crude Oil while the world is now talking about $100 plus Oil again.
So far in the above Crude chart we have gone basically sideways since I came out on this, and I have not taken any shorts yet. However, if we were to get a bounce as diagrammed in the above chart, I will be looking for short entries. This is by far the weakest of the 3 main energy charts. What I am concerned about is that with the stock indexes looking to be in big trouble here, that they just drag this down along with them without a bounce. However, that is just conjecture and we have to trade what is actually happening. So far I do not have a sell signal here yet. I did exit the BTU stock trade I showed the other day for a nice profit on Friday. That was tied to the overall weakness I am looking for in Oil. I wanted to be short an energy stock in case this thing broke. I suppose I could still be short but it went down 4 straight days and I more doubled my risk in profit, so I rang the register.
Just to once again remind people of why I am so bearish here, we have record long positions with the small speculators and record commercial short positions. If we happen to get a down move in stocks, look out below here. You commodities bulls better hope some of these markets hold right here, this is a critical inflection point for many of them. If we hold all is well, if not.........
One of my favorite things about Italy is the way everyone always has to have the last word. I got into one exchange where I traded about 10 prego's with someone on the way out of a store.You can say Prego to almost anything, soooo Prego!