The dollar sell-off we predicted may be ready to reverse, but look to the 10-year note for next breakdown, reports Jeff Greenblatt.
As you can see from the chart (below) our magnet line methodology gave good advance warning for the U.S. Dollar Index breaking support and it has done so in a big way. At 61 days off the prior low, it has an outside chance of getting a relief bounce very soon.
But we are living in a season where problems seem to multiply like the African locusts. As a society we’ve just gone from the frying pan to the fire. To see what is going on in this country right now, it’s simply mind-boggling to see the stock market continue higher. There was no economy to speak of and now if our cities aren’t made safe asap, whatever chance of a recovery will be gone for good. We know why the markets are going higher, it’s simply a manifestation of the Federal Reserve propping it up. It used to be the leg after a crash was a result of a forward looking market already pricing in future recovery that most market participants could not visualize yet.
Not this time. How do I know? Here’s the litmus test. With cities burning right now, what do you think this country would look like had the Fed not printed trillions of dollars? How many people would be on the streets right now without their economic impact checks or unemployment insurance? I rest my case. All they are doing is kicking the can down the road again.
That being said, the next problem is the 10-year Treasury note, which is starting to break down but has one out right here as it is 61 days off the high (see chart below). It could turn here, it needs to turn here and if it doesn’t, it could follow the path of the dollar.
We don’t know and this is not a prediction because it doesn’t need to be. The Kairos situation I’ve described to you over the past three weeks speaks for itself. Right now, the bond market is mostly sideways but if you look at the long bond, its slightly more bearish. But if this developing trend were to continue the value of the greenback is going to sink while the interest rates start going the wrong way.
Since civil unrest is now part of the problem, the whole world is watching domestic events and what confidence will they have in the U.S. financial system if the situation doesn’t start reversing course? We’ve reached a point where it’s impossible to ignore the political situation as it relates to financial markets but it’s becoming clear with each passing day the situation is not sustainable.
Let’s talk about the psychological aspect of trading these markets. If you are a longer-term holder, this doesn’t apply because you have your own issues to deal with depending on your entry levels. But I will say this. For those of you who do not trade intraday or shorter term daily, you’ll have to decide where to either lock in profits or absorb losses. Sitting in losing positions and hoping the action will come back to bail you out can’t be an option.
Even for moves that do work, many stall before they take off. You’ll likely have to withstand more heat on a retest of your pivot then in prior years. As opposed to the post 2016 election rally, this is not such a forgiving market. As a trader, you should be pursuing only the better setups.
In this environment, no trade is still better than a bad trade. But let’s say you can avoid bad setups. Let’s say you settle for setups that are slightly better than mediocre. The idea is to know your edge to the point where you can have conviction about the move. Why? Unless you are patient and disciplined enough to pick only the best moves, you may very well get shaken out of your own selections.
Some of the best setups these days materialize in the most psychologically difficult places to take a trade. The best trades have always required courage, but it feels like more courage than usual is necessary. Will you cut bait when the move comes back on you? Will you get shaken out of a move that goes your way but leaves you with only a ridiculously small profit when the move ends becoming much bigger than you thought possible?
What it comes down to is how much confidence do you have in your methodology and/or yourself? Here’s the challenge. A trader will never go broke taking a profit. Any profit in a trade is never a bad thing. The problem is the dynamics of being a winning trader means you are going to get stopped out and your wins have to more than cover your losses. In case you’ve noticed, when you get stopped out it usually happens very quickly and those lost points will hurt at the point in time you are able to pick a winner, yet don’t have the conviction to stay long enough to allow a winner to run.
For instance, if you are a Dow E-mini player and you take out 30 points a day, that’s good. But it’s also extremely easy to lose 20 points very quickly on something that doesn’t work. If you notice many of your 30-point winners developed into 50-70-point moves, you will struggle to sustain profitability. So, its vitally important to develop staying power to stick with the trades that do work given there will be plenty that don’t work. It’s difficult enough to pick winners but when you do its imperative to develop the staying power to get as many points as possible.
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