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The Cascades

By: Erik Swarts | Saturday, March 2, 2013
The Cascades

Picking up where we left off on Tuesday, the powerful kinetic feedback loop that began in the currency markets - appears to be gaining the critical mass needed to take a few assets over the edge next week. Specifically, we are looking at the euro, Australian dollar, gold and silver. Although the US dollar is becoming considerably overbought on the daily measure and has extended its longest weekly rally since before 2000, look no further than what transpired - either in its last secular breakout leg, or the two previous occasions that exhibited similar drops in historic correlations. As we cautioned on Tuesday, the risk continuum in this environment extends beyond normal distribution; i.e. - those looking at mean reversion strategies, either from an oversold price or sentiment perspective - may find themselves in a barrel cascading over the edge.

US Dollar Weekly Chart, QE Free 1994-1997 versus QE 2010-2013

Taking a step back, you can visualize the flows in the euro as it has meandered a massive top over the past six years. As we have referenced repeatedly, the atypical correlation drop between the euro and the US dollar index has historically marked exhaustion for the euro and has been followed by powerful retracement declines. Although the euro continues to follow the structure and momentum unwind of the Mirrored Pivot comparative (for an explanation, see Here) - the kinetic potential across the hard commodity-scape appears to be of the 2008 variety. In either case, we expect the next phase of the decline to become more disorderly on the downside.

Euro versus Silver Weekly Chart

Silver finished the week above its descending ledge of secondary support that extends from its peak in 2011 - to what we have perceived to be a false breakout this September with QE3.

2013 Euro versus 2013 Silver Weekly Chart

The parallel to 2008 in silver - through the EURUSD relationship, appears to be working towards a breakdown in the coming sessions.

2008 Euro versus 2008 Silver Weekly Chart

2008 Euro versus 2008 Silver Hourly Chart

As expected, the Australian dollar was rejected by long-term resistance in January - with the diminished correlation window (for an explanation see, Here) with gold resolving itself on the downside. Not surprisingly, this dynamic is most resemblant of the set-ups in gold and the Aussie in the summer of 2008.

Australian Dollar versus GLD Weekly Chart

Momentum continues to unwind in the Aussie along similar lines to the previous bookend of the US dollar secular high that ignited the massive commodity cycle in 2002. And just as the Fed at the start of the previous decade attempted with little success at pricking the perennial strength of the dollar, the RBA to date has found limited traction in jawboning the Aussie lower. It appears they may soon get what they wished for.

US Dollar Index 2000-2003 versus Australian Dollar Weekly Chart

Taking the comparative Delorean a bit further back, gold also continues to unwind along very similar lines to its previous secular high.

Gold 1979-1981 versus Gold 2011-2013 Weekly Chart

Leading the charge lower in gold, the miners continue to underperform spot prices by a considerable margin. Until we see the structure and momentum profile within this ratio of a low - the highway down in spot prices in the precious metals sector remains as open as Route 66.

BKX:SPX 2008/2009 versus GDX:GLD 2012/2013 Daily Chart

2002 NDX versus 2013 CRB Daily Chart

Continuing the theme of the next chapter in the great commodity unwind/deflation that has been in effect since QE3 was introduced in September; we do not consider it a mere coincidence that both the commodity markets and the commodity of momentum itself that became Apple - have been breaking down along similar lines. We feel that the old market adage, "Commodity market weakness presages equity market weakness" - rings especially true today, despite the resilient bid in the equity market indices.

Apple 2011-2013 versus OIL 2007-2009 Weekly Chart

Apple 2011-2013 versus OIL 2007-2009 Daily Chart

It is our expectation that the spoils of this disinflationary dynamic will soon start to present themselves in considerable market turbulence within the equity markets. That is unless it is in fact different this time.

Silver:Gold versus SPX Performance Spread Weekly Chart


* All stock chart data originally sourced and courtesy of
- Subsequent overlays and renderings completed by Market Anthropology.


Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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