Silver vs NASDAQ vs Bitcoins

Here are three bubble charts for your review.

The first one, silver, rallied from $1/oz to $41/oz at the peak of the bubble in about 8 years, an annual growth rate of about 60%. Note that the metal subsequently lost about 90% of it’s value. Selling at any part during the bubble phase ($10-41) would have been prudent in the long run.

 

Here’s a more well-known, but less severe bubble. This second chart, the NASDAQ composite (internet bubble, anyone?) rallied from about 150 to 5000 in just over 20 years, an annual growth rate of 6-7% per year. Because the bubble was less severe than gold, the NASDAQ ended up losing only 80% of it’s value. However, once again, selling at any point in the bubble phase (2000-5000) would have been prudent in the longer run (i.e. you could have bought back at lower prices such as $1000).

 

Now, take a look at the Bitcoin bubble. It’s up from $5 to $210 (as of 4/9/13) in about one year for an annual growth rate of 4100% or so. As you’ve seen above, the more severe the rally, the more severe the decline, so I would not be surprised to see this drop 90-95% over the next few years. Therefore the strategy is this: if you’re up 100%, sell half you bitcoins to lock in your cost basis. The remaining bitcoins are pure profit, so even if bitcoins drop to $0, you haven’t lost any money. If they keep rallying, you can choose to sell a few to lock in profits.

The conclusion is clear: bitcoins are no less vulnerable to being a bubble than silver was in the 1970s and the NASDAQ was in 2000. The both had amazing fundamentals at the time, and they both crashed 80-90%. Fundamentals change, as well as investor perceptions.

First USD/CHF reversal confirmation

A few weeks ago, I switched from long EUR/CHF to long USD/CHF. I still like this position, and today, the first sign of a trend reversal came out.

Notice on the daily chart above that USD/CHF has now clearly had the biggest rally of the entire downtrend. Coupled with clear MACD divergence, I think this indicates that the character of the downtrend has changed, and a new uptrend is potentially forming.

Trading in EUR/CHF for USD/CHF

Today we arrived at two conclusions: 1) EUR/USD looks bearish. 2) we still like EUR/CHF bullish as discussed a few weeks ago. Thus, we wanted to trade both currency pairs. Of course, we quickly realized that EUR/USD short and EUR/CHF long is the same as trading USD/CHF long. So we did some analysis, and we’re now quite confident in trading USD/CHF long. We’ve switched our EUR/CHF long position to USD/CHF long position.

The chart above (EUR/CHF daily chart) identifies why we were happy to switch out of EUR/CHF long. Notice that the pair bounced of 1.28 as expected, with nice MACD divergence. However, it is testing strong resistance, and just broke an ascending trendline, so it may be under pressure for some time.

The next chart (above) shows why we think EUR/USD is bearish. According to the Elliot wave count, the declines from 1.60 have been impulsive (5-waves) and the rallies have been corrective (in three waves). Currently, it looks like EUR/USD is completing a 3-wave rally to correct the drop from 1.50 to 1.18.

Thus, since we generally like EUR/CHF long, and EUR/USD short, we want to go USD/CHF long:

 

The 15-yr monthly chart for USD/CHF (above) looks rather bullish. First, notice that a 5-wave decline is nearly complete, which indicates a strong counter-trend rally ahead (multi-year). Second, you can see that price is holding at a very strong, long-term trendline (we believe this line will hold, so if price closes below this line on two monthly candles, we will exit the position). Third, Wave-3 ended with a parabolic move. Then, the currency pair went on to retest the parabolic low twice, but so far has not broken it substantially. We think this is quite bullish. Fourth, notice the MACD divergence that could be potentially forming.

Zooming in on the USD/CHF chart (3y weekly chart above), you can see that Wave-5 has formed inside a channel that very closely resembles an ending diagonal, which indicates strong reversal ahead.

While the technicals appear strong for USD/CHF long, the COT data also supports this notion:

First, notice that the 78-week index for Commercial traders of USD are nearing the 100 percentile mark, meaning commercial traders are becoming very net long.

Swiss franc commercial traders are very close to the 0 percentile mark, indicating that they are very, very net short.

Overall, it is a bit frightening to go long USD/CHF when it’s in such a clear downtrend. However, the technicals indicate that it is nearing support, and the COT data shows that we’re taking on the same position as the smart money commercial traders.

Our trade plan is to exit at a loss if USD/CHF closes below the monthly trendline described above for two monthly candles. Our initial upside target is 1.05, and then 1.15.

Flat on EUR/USD

I am currently out of the EUR/USD and plan to avoid trading it for a for weeks/months. I am not sure what it will do going forward, but my bias is slightly bullish. If EUR/USD does happen to rally to 1.35-1.40, I will at that point look to re-initiate a short position.

You can see in the chart above that the EUR/USD did respect the trendline resistance I wrote about at the end of July. However, the selloff was very sharp, and a little too “obvious” in my opinion; i.e. anyone observing would now assume that the downtrend is back in full force. I think it will take some more time to neutralize the bearish EUR sentiment, so it would not surprise me to see a rally to 1.35-1.40. Either way, I have no risk on EUR/USD at the moment, so I don’t whatever happens.

Will the EUR/USD Collapse?

I had been shorting EUR/USD from 1.51, and closed out the trade when the EUR hit 1.2700. However, I acknowledged in that post that there was the potential for more downside. We did in fact continue selling off hard, to below 1.20! Commensurate with this selloff has been the creation of a massive bear herd—now it’s obvious that the euro WILL collapse! I think the EUR/USD will bottom soon and test 1.3250.

Take a look at the chart above. From an Elliot Wave standpoint, we are nearing the end of an extended decline. Wave-V from 1.52 is nearly complete, and was approximately as long as the distance from the beginning of Wave-I to the end of Wave-III; this is a common occurrence when Wave-V extends. Wave-iv of Wave-V formed as a triangle, and triangles often indicate a move is nearly exhausted. If we do bottom, a rally to 1.2750 followed by a rally to 1.3250 seems reasonable.

The chart above shows the USD Index. I show this chart simply to highlight the triangle that USD broke out of. This sort of thrust is usually terminal.

The next few weeks should be very interesting!

Closed out EUR/USD Short Trade

If you look at my last post about EUR/USD, you can see that I favored the collapse scenario for the EURO. We certainly got a nice swoon! My target on this trade has been 1.27 for a while, and since we got that price today, I decided to take profits and sit out for at least a couple weeks. I believe we could see additional downside, but 2,300 pips in 6 months is fine for me.

 

On the daily chart above, notice that price easily pierced the weekly trendline dating back to 2002! I believe that the congestion around 1.35 was where all the buying pressure from that trendline was absorbed. Once the buying power was absorbed, there was nothing to hold up the EUR when it actually reached the line, and it was able to easily collapse (probably tricking many a retail trader who bought there for an ‘easy profit’).

Regardless, if the EUR/USD bounces from here, it appears that there could be one more wave down to follow. I would love to see price break through the 2008/09 lows before starting a sustained uptrend, just to create the bearish sentiment required for an uptrend.

EUR/USD still looks bearish

As you know, I’ve been bullish USD and bearish EUR/USD since about 1.48-1.50. So far, the EUR has had a very strong downtrend. I am guessing that this downtrend will meet some serious support in the 1.27 zone.

In the daily chart above, you can see that EUR/USD is carving out 5-waves to the downside. This indicates that the larger-scale trend is down, and we should stay below the 1.51 high set back in December, 2009. 1.27 shows a nice confluence of trendline and channel support, so I could see the market falling to that level before the market enters a protracted corrective uptrend.

USD could be coiling for another large rally

After beginning a nice rally, and subsequently correcting that initial move, the USD has put in a higher low and appears ready to break out to new trend highs, hopefully confirming an uptrend. I think the odds that this move will be sustained are higher than even.

The reason I am still bullish is that the USD has held up very nicely and has formed a cup-and-handle pattern (see above USD/CHF chart). If price breaks above the top of the handle, it should sustain a nice continued rally, as opposed to reversing and continuing the long-term downtrend.

The EUR/USD just won't break it's uptrend

You can my post here from last week indicating the EUR/USD uptrend was broken. However, we got a quick reversal that brought price back above the trendline. My bigger picture assessment remains the same, however. I think the EUR is completing a topping process.

You can see my wave count for the EUR/USD. It looks like Wave-IV is subdividing nicely, with Wave-v taking shape as an ending diagonal. I could see a rally to 1.52 to complete this pattern, then we should enjoy a sharp sell off, similar to what we had during Thanksgiving.

EUR/USD breaking down

As I mentioned in this post, I thought that the EUR/USD would continue to weaken because of the divergence that it was showing against the US Dollar index. We've had choppy downward action, and I think we're getting ready to start the fast phase of the decline. Watch 1.46 as a downside pivot.

You can see in the daily chart above that EUR/USD finally closed convincingly below the uptrend line that has been supporting price action since March. Unless we get another quick spike back above the trendline, I think we'll be in for continued weakness. Keep an eye out on this.

US Dollar Index Divergence with EUR/USD

A week ago, I noted that /DX had made a lower low while many of the major currencies in the basket which comprise the USD index did not make similar higher highs. Today, the divergence continues, and until it is canceled, it looks like /DX could have a serious rally in store.

The above 1h charts are /DX on the left, and EUR/USD on the right. Notice again that EUR/USD has yet to breach the previous high, whereas /DX has clearly breached it twice now. This is bearish divergence for the EUR/USD, and looks bullish for /DX, as long as EUR/USD does not rally to new highs.