China: Ending the Dollar "Peg"?

China announced this weekend that they would show "flexibility" with regard to pegging the value of the Chinese Yuan to the US Dollar. This peg has been in place since 2007, as financial markets demonstrated turmoil. This, of course, has become a major economic issue as the US policy makers see it as blatant currency manipulation that prevents decreasing the US trade deficit (buying more from China than we sell to them).

So overnight futures markets are taking this as some sorely needed "good news" that could propel future US economic gains. Yet, there has been no change in the exchange rate peg and China has stated publicly that it will not make any moves in permitting it's currency to appreciate, nor can anyone truly expect that they would. Some are predicting that China's currency will actually DEVALUE against the US Dollar, given their dependence upon US and European markets to sell their goods. I have a feeling the Chinese will likely keep any variation very limited so as not to stir of financial chaos as people unwind positions they've held based upon the speculation that China would not de-peg the Yuan from the dollar. And China has stated that such "flexibility" is not going to solve the financial morasse we're ALL in (including China).

Flexible yuan won't rebalance world economy

Given my previous post, and the mounting evidence of China's real estate bubble posing a MAJOR problem, it's likely Bejing might even let their Yuan devalue against more transparent currencies in order to boost the demand for their products. Additionally, China is facing mounting pressures from it's workforce for increases in their salaries. Raise salaries in China by 25% and they will eventually have to devalue their currency to maintain their export competitiveness.

So much for the fundamental picture...

So what does all this mean? Well.. if you're short (as I am to a limited degree), we're going to feel some financial pain tomorrow and possibly into most of next week.

If you're long the market, you have to ask yourself whether this is going to truly make a major difference to the data I've been reporting over the past several weeks. Does this mean a new Bull market is underway, or did you just get handed the chance of a lifetime to sell your holdings into the short-squeeze that may possibly erupt this week? When the squeeze is over, it's likely this market is going to fall hard.

Remember.. if you're long the market, the most you can lose is 100% of your investment (assuming it goes to zero). If you're short, your losses are technically "infinite" if the market never declines. And there are lot of people who are short this market, for very solid fundamental reasons, and there could be a mad scramble to cover their short positions this week. They've all been looking for 1150 on the S&P to be the top of the Right Shoulder of this H&S. SPX 1250 will definitely prove them wrong. Anything lower than that level will either be a H&S right shoulder, or a Double Top of the previous 1200 April, 2010 high.

To repeat.. for those holding stocks (longs), your signal to stay long for a new Bull Market is if the S&P reaches 1250 (11300 Dow). If the market turns down hard before getting to that point, then your sell signal is a close below 1103 on the S&P500 and definitely be out if it gets back to below 1040.

Remember Longs.. for a Head & Shoulders formation to be nullified, it HAS TO MAKE A NEW HIGH on the right shoulder that exceeds by a good percentage, the previous high evidenced by the "Head". Again, that's exceeding at least 11,300 on the DOW and 1250 on the SPX.

SPX chart with 100 Week MA

Now.. here's the kicker.. remember that 12 years DOW chart I posted a few weeks ago?

Mother of all H&S revisited

For THAT long term H&S to be nullified, we need to see the Dow get back to 14,500 level we saw in 2007.

Get ready for the E-ticket ride starting at 9:30 AM tomorrow.

Scrutinizer