Will the Market Break Its October 10th Lows?

At this point in time, we still believe that last Friday the 10th of October was a climax white eye day, which means that the market will struggle to break those lows.

However, this view is not tradeable just yet, and requires a passage of time to pass before the probability increases. At the moment, the bulls and bears are fighting hard and the ranges are massive. Only after the ranges contract do the risk reward payoffs come back into line and signal a time to trade.

It is likely that the ranges will remain volatile then contract in a few weeks.

It is worth nothing from our watch list comments:

That below the 9800 level was a clear break of a 25 year uptrend. This level will prove tough resistance while the lows from last Friday will provide support. As ridiculous as it sounds that’s a 2250 point range that the Dow could be captive to for some period of time. And if that sounds a little big, consider last night’s 816 point trading range!

On that white eye climax day in stocks (10th October), the USD rallied 2.2%. It has been our opinion that since July 2008 the USD has been bought initially by short covering then by momentum traders. It was then helped along by official jawboning (from Ben Bernanke) and even intervention.

Enter the mad cash scramble.

The banks of the world have also been scrambling to sell assets like CDS, bonds etc in return for USD. This is the credit crisis. Actually it’s a liquidity freeze. This has been to date a bit like musical chairs - the last one without a chair (liquidity) collapses. Then the governments stepped in.

Governments have pumped USD into every living bank in the world.

As our comments from a few days ago alluded to, CASH IS KING. And the banks are behaving the same way as we are. By hording USD you are creating a demand for USD. And this coupled with the other reasons to buy (short covering, jaw boning, etc.) is the reason the dollar is rallying.

It is our view that the demand for USD purely on the back of hording cash is a transient trend that will pass. Transient means that it will fade, though for now it is a major driver. Gold’s selloff overnight is evidence of a market that still desires USD.

In time, as markets settle, and the massive cash injections start to move the US economy, the only way to forward for the US will be by having a weaker currency. Just like Japan in the 1980’s, a weak currency will help to support stock prices.

Though for now this is in the future. The USD rally on the back of cash hording is likely to be with us for a few more weeks/months.

Comments

[Metzenbaum ...:]

With all respect, not a fact, just an opinion, gold is being sold to raise dollars which are funnelled into US Treasuries... .

2008 Oct 19 02:22 PM

[Steven Hansen:]

yes, the usa needs a weak dollar to bolster the markets and export markets. but this will not come to pass unless a shoe falls which casts doubt on the dollar. this too is unlikely as the other currencies (except yen) have observable problems which shakes confidence in those currencies.

because of this look forward to a long period of low and negative growth in the usa.

2008 Oct 20 01:34 AM