Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Price Charts Say Niet to Petro Ruble for Now.
Duarte in the Money Options
April 10, 2022
There is a growing chorus, certainly on the fringes of financial analysis at the moment, that the U.S. Dollar is in the early stages of collapsing as the world’s reserve currency. This set of expectations is based on familiar themes: the long standing and growing U.S. budget deficits, the political disarray in Washington, and the current inflationary environment.
Moreover, those proposing the end of the greenback are betting that the dollar will be replaced by commodity based currencies such as the ruble, while others are saying that cryptocurrencies will be taking over as the major mode of exchange.
These are not necessarily a new set of beliefs but they are gaining momentum in some circles due to the war in Ukraine. Specifically, the central tenet of the movement is the belief that oil will be bought and sold with rubles and yuan and thus the dollar will lose its petrodollar status and die.
Of course, it is plausible that this may come to pass. Yet, at this point, it’s not quite evident.
Price Charts Say Niet to Petro Ruble for Now
As things stand at the moment, despite expectations to the contrary, the global financial system is still following the operating rules based on the petrodollar. Consider the following price charts which are based on the markets responding to these three simple inflation related events:
- The Federal Reserve is in the midst of raising interest rates
- There are supply chain snags everywhere
- The Russian invasion of Ukraine is adding high levels of unpredictability to everything
First, the Fed’s rate hike cycle has prompted a cycle of aggressive selling in the U.S. Treasury bond market. Note the new highs for the cycle on the U.S. Ten Year Note yield (TNX).
Next, note that the U.S. Dollar Index (USD) is rising in nearly perfect synchronicity with TNX. That’s because higher interest rates in any particular country tend to make that country’s currency more attractive than others.
A look at Bitcoin (BTC) versus the U.S. Dollar shows the cryptocurrency pulling back just as key proponents are talking it up. Enough said there. I’m not against BTC, I’m just pointing out that its price will fluctuate and that it’s not showing signs at the moment of becoming the reserve currency.
Meanwhile, the Ruble took a huge hit upon Russia’s invasion of Ukraine, especially against the dollar. But recent trading action has brought the Ruble and the Dollar’s exchange rate back to where it was before the war.
So, at this point, the market is saying that it’s watching to see what happens but that there is no real reason to change the exchange rate between the two beyond where it was prior to the war.
Finally, note that the rise in TNX and the U.S. Dollar have led to a pullback in oil prices (WTIC). That’s because a strong dollar will buy more oil, even from Russia which has been selling its crude at a discount to some of its buyers such as China.
In effect, we’re seeing is a market responding to higher interest rates in the midst of a highly volatile geopolitical environment. And, so far, there are no signs of malfunctions in the relationships between the asset classes.
At the same time, the bond market may have come too far too fast. Moreover, the huge increase in bond yields will likely have a negative effects on the U.S economy, especially the housing sector and in the ease of obtaining credit for companies and individuals.
And of course, when a certain point in that trend is reached, we will probably see a slowing economy.
But at this point, there is no evidence that the dollar is in any peril of losing its status as the world’s reserve currency, which suggests that until proven otherwise the Petro Ruble or the Petro Yuan, or even the Petro Bitcoin have not arrived
That, of course, could change at any moment. It just doesn’t seem to have happened last week.
Welcome to the Edge of Chaos:
“The edge of chaos is a transition space between order and disorder that is hypothesized to exist within a wide variety of systems. This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder.” – Complexity Labs
For more on how to develop a trading plan and how to approach this market have a look at my latest Your Daily Five video here.
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NYAD and SPX Fall Below Key Support
The New York Stock Exchange Advance Decline line (NYAD) has failed in its attempt to rise above 50-day moving average while the RSI has fallen below 50. That’s a Duarte 50-50 sell signal. These signals, however, can quickly reverse but it they are always reasons to be cautious.
Meanwhile the S & P 500 (SPX) remains below the key resistance area of 4600, while straddling its 200-day moving average and closing the week just below the 4500 area.
Accumulation Distribution (ADI) is still positive while On Balance Volume (OBV) is slightly off of its recent high confirming the consolidation pattern.
Nevertheless, the rally is showing signs of stalling. Thus, a continuation signal would have to include the following signs:
- A decisive move above 4600
- The S & P 500 needs to hold above its 200 day moving average and rally from there
- Further improvement in OBV and
The Nasdaq 100 index (NDX) is sitting at the lower end of the trading band enclosed by the 50-day moving average on the lower end and the 200-day moving average on the upper end confirming the possibility that the rally may be reversed.
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VIX Declines but Prices Still Fall
The CBOE Volatility Index (VIX) has been falling of late. Normally that’s a positive for stock prices. But last week, the relationship did not hold up as stocks and VIX fell simultaneously.
That suggests that even though sellers or those betting that stocks will fall via buying put options may be pulling back, buyers are also avoiding the market. As a result, market makers have little choice but to mark stock prices down. This, of course also means that market makers are also hedging their bets.
Remember that a rise in VIX signals that put option volume (bets that the market is going to fall) are on the rise. What follows when put volume rises is that market makers to sell puts and simultaneously hedge their bets by selling stocks and stock index futures. This causes the market to fall.
So for now we have to see how this situation develops. In the end, price is the ultimate truth.
Speaking of VIX, in my recent video, I expanded, in detail, as to how this process works.
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