GDP numbers are released and markets immediately goes into reactionary mode. At 2:30 pm a wolfewave pattern sets up on the 5- and 15-minute time frames. It also represents a measured move target level following a noon swing high.  Thanks to Huddy in b-line channel for the chart.

Caution Ahead

The VIX, or volatility index has produced a falling wedge pattern on the daily charts and on Wednesday tagged the 78.6% retracement level.  It also produced a solid bounce off the 200 day moving average around 36.5 and 2007 spike highs of 37.5 (past resistance becomes future support) as well as a pixel-perfect trend line test combined with a positive divergence (lower prices, higher momentum).  This indicator moves inverse to the stock market, and therefore is giving a bearish signal for equities.

Linda Raschke made an interesting observation about support / resistance levels.  Rather than assuming that price action will bounce off spike high / low marks, it is also good to consider ‘pockets’ or inflection points which produced a reversal.  Such is the case as the 2008 financial crisis produced a fall directly into the 2002-2003 pocket.

The dollar is now facing a similar technical level as it retests the DXY 87-88 level.  The Japanese yen is in a similar situation as it tests the 1.13 pocket on a daily basis.  In this endless cycle of competitive currency devaluation, we are now approaching a juncture where foreign exchange traders can short dollars and yen.  As far as equities are concerned, this should produce a lift as a weaker currency is deemed to be advantageous for corporations.

Currency devaluation produce effects on nominal prices.  In order to keep things equal, devaluation will produce a perceived higher price for the same goods.  In June 2001, the dollar index topped around 120, only to fall precipitously to around 72 by July 2007.  The net effect is that gasoline skyrocketed along with other commodity prices.  As the dollar strengthened last summer, the CRB (Commodity Resource Board) index headed the other direction and produced a significant top.  The same can be said for the Dow Jones Industrial Average which peaked a few months later around 14,000.

It benefits the trader to keep an eye on the foreign exchange market, since it is the means of producing stealth price adjustments.  A currency devaluation is an easy means to entice the public into believing that prices are going up, yet what is really happening is that your buying power is diminished.  Looking back at the Dow Jones in 2000, it appears as if the 11,215 peak was shattered in 2007, yet in dollar-adjusted terms, a 62% (Fibonacci fans rejoice) retrace was completed.