Yesterday’s The Independent newspaper in the UK reported a number of nations are planning to dump the US dollar to price crude oil. You shouldn’t underestimate the importance of this news.
It would be the ultimate snub to America. And it would jeopardize their plans to print their way out of trouble.
Should it happen, it would define worldwide markets and set the overall direction for years to come.
Naturally, you might expect me to look at the crude oil chart. But no. The place to look is the US bond market. Because without all of those recycled ‘petrodollars,’ where would the demand come from for the mountain of debt the US is unleashing on the world?
Last night saw the largest ever issue of 3-year bonds in the United States. It was USD$39 billion worth. And that’s only part of a total USD$162 billion of short and long term debt to be sold this week!
So, is the world finally tired of accepting pieces of paper printed by the Fed for their assets? And if so what does that mean for the markets?
These are big questions and ones that need to be understood so you can align your portfolio to the forces that will shape the markets for years to come.
If oil dollars are no longer recycled into US bonds, one of the last remaining legs will be pulled out from under the US bond market. And it’s at a time when they can least afford it. This will have a knock on effect to the pricing of all US debt, including housing mortgages which are priced off longer dated bonds.
If you look at the monthly chart for US 10 year bonds, it’s quite incredible…
If you’re a trader with access to trading US bonds, an easy trading idea is to short them now. Just put in a stop above 122.
An alternative trade is to buy long dated out of the money puts (for example 114 strike), and then hedge your position once it gets there.
Either way, there’s money to be made on the downside here.
This chart has all the moons aligned at the moment so it’s well worth keeping your eye on it. I believe it will give you an insight into the future stock market direction.
But take a look at the chart again. Notice the old major high from 2003 of about 120. We had a major false break of that level in 2008 with the blow off rally to 129. The failure of that rally saw a pullback to the midpoint of the range between 108 to 120 in June this year. That’s around the 114 level.
Since then we’ve had a rally in an ABC formation to retest the top edge of the range (what I like to call the distribution of price, or just distribution) at 120. This also lines up perfectly with the downtrend from the 129 high.
An overlap at “a” will signal the probability of a failure back inside the 108-120 distribution with an initial target back to the midpoint at 114. However, a failure there could see a quick move back to the other edge of the distribution at 108 and from there the whole bond complex would look very weak indeed.
If you’re a trader that believes in head and shoulders formations (I’m a bit of a skeptic to be honest) notice how the last two years price action is shaping up as a perfect head and shoulders.
News such as this is the necessary catalyst to a reassessment of US bond demand and has the ability to spook investor appetite. All investors should understand the consequences of this news and be ready to act if it proves true.
Regards,
Murray.
