Despite weaker than expected Chinese Trade Balance stocks actually performed well on the back of PBOC rhetoric concerning the currency, taking it to its strongest level against the USD in almost a year (6.4935). It has however, weakened since China close and the off-shore was last seen in NY at 6.5200. Shanghai closed +3.3%, Hang Seng also closed better at +1.1% and after a volatile day in Japan the Nikkei closed small better +0.2%.

Late in Asian trading and just ahead of the European open, we heard rumours that Saudi and Russia had agreed to level current exports resulting in a huge 5% bounce in the oil price. These gains were short-lived and by the end of US trading all gains had been returned and were closing down on the day (below $30 at $29.12 -1.1%). This was the excuse provided by dealers as to why we saw a strong open for European stocks only to finish their day on the lows. German ZEW failed to live up to expectations, UK Inflation (0.3% for Jan) is still way off the annual 2% BOE target, EDF Energy saw a 68% decline in net profits (took a 3.6bn one-off impairment charge) and a vocal ECB still had the markets in a bit of a spin concerning direction and confidence. Amidst all of this Standard Charter’s stock (normally seen as stable) was down 5% as strategists cut forecasts. DAX, CAC and IBEX all closed around -0.5% lower. FTSE was the exception to core closing up +0.6% but they did see a 1.1% depreciation in the GBP.

The US indices performed well closing up +1.4% and on the days highs, this despite the Empire Manufacturing Index came in -16.6 but better than the January -19 number. One of the reasons talked this evening is the steady drift into the USD. DXY closed this evening at 96.93 a gain of 1% on the day.Gold and Treasuries were the losers today with gold trading under $1200 at one stage. We closed this evening at $1202 a fall on the day of 3.2% or $38 lower. 10yr US Treasuries gained 3.5bp today to close 1.78%. The curve steepened 2/10 to close 106bp. In Europe the German 10yr Bund closed 0.26% which closes the spread at +152bp. Italy 10yr closed 1.62% (+2.5bp), Greece 10’s closed 10.68% (-16bp), Turkey 10’s 10.49% (-3bp) and finally UK 10yr Gilts closed 1.44% (+1bp).

Gold and Treasuries were the losers today with gold trading under $1200 at one stage. We closed this evening at $1202 a fall on the day of 3.2% or $38 lower. 10yr US Treasuries gained 3.5bp today to close 1.78%. The curve steepened 2/10 to close 106bp. In Europe the German 10yr Bund closed 0.26% which closes the spread at +152bp. Italy 10yr closed 1.62% (+2.5bp), Greece 10’s closed 10.68% (-16bp), Turkey 10’s 10.49% (-3bp) and finally UK 10yr Gilts closed 1.44% (+1bp).

The euro continues its fall and the likelihood of reaching 116 is starting to dwindle. Even the British Telegraph has come out and stated that the bail-in plan for government bonds in Europe risks destroying the entire euro system. We have to understand that those in power are clueless. All they do is try to defend their prior decisions by insisting they are correct and the world is wrong. When we look at the volatility and panic cycles starting next week, it appears the crisis may emerge in Europe.

We can see how this crisis could help an extended gold rally. We are also seeing the Dow holding, which is the international money for they like to buy the trophies whereas the S&P 500 is domestic. So we have not penetrated last year’s low in the Dow and there is NOTHING that takes place without a reason. The Daily Bearish to watch in the cash euro is 11070. A daily closing beneath that warns this may be down and dirty.

When we look at the technicals, the Stochastic is turning down as well. We did not exceed the recent Breakout Channel and the former Downtrend Line lies at the 109 level. Penetrate that area and we are off to new lows.

Gold fell back to 1191 and then rallied back to the 1216 area. Gold appears to be setting up to extend the counter-trend reaction into the first week of March. With back-to-back Directional Changes for the weeks of 02/08 and 02/15, the typical outcome is one of a choppy trend. Last week we got the high and this week may produce the reaction low. If this proves to be the case, then we should extend the rally into the week of the 29th. Overall, volatility should begin to rise over the next three weeks. So stay nimble and objective. If we rally into the end of the month, then we can still see a test of the 1309 area.

Using our What-If models, we suspect that a new high during the week of 02/29 should bring in a Weekly Bearish up to the 1170 area. If that is elected, then gold has most likely prolonged the agony and we will then look to the next Benchmark. None of the price action so far has negated the potential to penetrate the $1,000 level for a final low.

Trading  is something you have to develop a “feel” for. The only way to do that is with experience. The object of our modeling is to place the entire world before you. Once you become familiar with how to use the model, you will be able to look at any market and ascertain its direction based upon experience with the model in other markets.

Using the reversals with timing in “reverse” is one of the best trading strategies. Doing this is what awarded me Hedge Fund Manager of the Year in 1998. In 1998, I sold $1 billion worth of yen against the Yearly Bullish Reversal at 147 on an MIT (Market If Touched) just before the Long-Term Capital Management collapse. It was 16 days after the Economic Confidence Model turning point that year on July 20, 1998.

We had also only reached three Downtrend Lines. The timing was correct for the yen. We were at a major turn in the Economic Confidence Model. Our models had forecast that Russia was about to collapse, which manifested in the Long-Term Capital Management collapse.

Everything was in line. This is what we are porting over and the computer will articulate this as everything lines up.

QUESTION: Mr. Armstrong; I assume you have studied this hunt for money government goes through. Has it always ended in the collapse of government?

Thank you

PD

ANSWER: No. It really depends upon the economic system in place. There are two comparable plagues that devastated the world population. One ended in oppression and the other gave birth to capitalism. It is like the battle between public and private. It depends on what side you reside when it hits. In a public wave, taxes rise to compensate for the decline in population, whereas in the latter we find the birth of taxation applied to individuals who suddenly are free to earn money.

One of the worst such events coincided with the Justinian Plague (541-542AD) and was a pandemic involving Yersinia pestis, the organism responsible for bubonic plague. This hit the population on a monumental scale, creating a wave of devastation comparable to the Black Death that came about 600+ years later (2 x 309.6), which created capitalism by killing about 50% of the people and ended serfdom by reintroducing wages during the 14th century. It is estimated that about 25 million were impacted on its first wave but recurrences struck, bringing the total death toll to perhaps 50 million. The primary source describing this as a worldwide event in history has come to us from the noted contemporary historian during the 6th century, Procopius of Caesarea (Procopius Caesarensis; c. 500-560 AD).

The Justinian Plague (541–542 AD) resulted in 5,000 deaths per day in Constantinople, but the Emperor responded with massive taxation as the pestilence swept through the known world; notably the Roman Empire. Justinian is remembered for his legal code reforms, but also for massive taxation for trying to restore the fallen glory of ancient Rome by waging a series of military campaigns to retake lands that had been overrun by barbarian tribes. The plague wiped out most of the farming community and impacted the tax revenue of the government. It was taxation that was different from the Black Death. Here taxation was applied to individuals, whereas latter taxes were minimal and applied only to landlords. Justinian showed no mercy whatsoever when it came to the collapse in his tax revenue. Despite the human desolation, Justinian hunted the ruined freeholders. He not only demanded they pay his annual tax even if they had no income, but he increased the tax on those living to compensate for the amount of taxation their deceased neighbors were liable to pay.

Justinian I was rather ruthless when it came to taxation. There was a tax revolt that boiled over on January 13, 532 AD, known as the Nika Revolt, which emerged when an angry populace arrived at the Hippodrome in Constantinople to watch the chariot races. The Hippodrome was next to the palace complex where Justinian could watch from the safety of the palace. The spectators were hurling insults at Justinian for his taxes. Initially, it was a contest between two opposing teams known as the “Blue” and “Green.” After race 22, the chants began to change to Nίκα (“Nika”, meaning “Win!” or “Conquer!”). The crowds became violent, and for the next five days the palace was under siege. They set fires that destroyed most of the city including the church, the Hagia Sophia, which Justinian would impose harsh taxes to later rebuild.

Therefore, in this instance, Justinian I raised taxes on the 50% who survived so his revenue would not decline. Since this was a period of capitalism where individuals earned money for their labor (in socialism/communism the state earns the profit from the labor of the population), taxes were raised on the people. The Black Death ended serfdom as labor became scarce and landlords had to offer more than 20% of the food and a free housing to work their land.

Mario Draghi has claimed that the European Central Bank would withdraw its €500 highest-denomination banknote only to combat crime— not to curb the use of paper money — but you really cannot expect him to tell the truth. If he really told the truth, he would set off a panic withdraw from banks.

The USA use to print $10,000 notes in 1934. That stopped with Roosevelt and the birth of socialism to prevent people from storing cash to escape taxes. There was no excuse of terrorism or crime. Crime has actually declined. Draghi is simply engaging in political bullshit by denying the truth so he can quietly remove cash from society. Teddy Roosevelt even used recorded speeches for people to listen to during the election of 1912 to press the socialist agenda under the Progressive Party. The night of the election in 1932, there were rumors that Roosevelt would close the banks and devalue the dollar. Hoover begged him to come out and say he would not for the rumor set in motion a banking panic. Those with money withdrew it. Roosevelt came out of the high of the election and lied to the public by saying he would never do such a thing. In fact, if he told the truth, people would have poured into the banks and withdrew their deposits in gold. So he lied, and then demanded all gold be turned over to the Treasury, and then he devalued the dollar in 1934.

So never pay attention to the words of politicians or central bankers. They can never say what they will do for the public will act in a counter-trend move. Draghi is withdrawing the €500 notes for the same reason FDR stopped the Treasury from issuing high denomination notes — taxes; not crime nor terrorism. It has always been about money.

QUESTION: Mr. Armstrong,
First of all, thank you for all you do.  These are crazy times and so many of us would like to thank you for your guidance through these volatile times.

The question I have and I’m sure others do as well is in regards to the election of the reversals.  I was an attendee of the Princeton, NJ conference and have been lucky enough to experience the trader level of Socrates.  I also read your blog religiously and have noticed you speak about 1209, 1309 and 1363 as major reversals for gold.  1209 for the week closing and the gap being up to 1309 and 1363 as the monthly.  My question is that while reviewing the trader level of Socrates I see many reversals between these numbers etc…  Some of them are even labeled as major and others are not labeled as major but have numbers next to the reversals.  Is it possible to get a clarification about this.  I see that the system updates for the reversals show buy and sell levels at various levels(on the blog, where you are long and short) in each market and like you have said its best to just follow the reversals.   I would like to know which reversals to follow and how you decide on which reversals are significant and which should not be traded.  Thanks in advance for your response.

TG

Now look at how the computer did with gold on each level of time. It was different.

When I am talking about the long-term, I am obviously filtering the reversals and using the monthly and up. That is where the change in trend takes place; not on the daily or weekly. So we filter the reversals with time depending upon your objective. If you are just scalping the market then you look at the Daily, and the Weekly makes sure you do not get caught in a counter-trend reaction that can be a few weeks or 1 to 3 months.

There are additional numbers between 1209 and 1309 so there is no guarantee we will reach 1309, which is where the Yearly resistance begins. When the time is up for the rally, then whatever price we have reached will be it. Saying we had a gap between 1209 and 1309 was correct. You saw a raid $60 move, poking through 1209.

We are expanding the trader version with separate reports written for each level. This will help you to refine what is your trading objective with respect to how active do you want to be. Keep in mind, typically lowering your trading activity increases profits. Far too often, the more frequently you trade, the more you get caught up in bad trades by second-guessing yourself because of risk. That is only human.

What we are porting over is the trading system that incorporates reversals with time. Blending both and using the reversals as exit points allows you to pick the highs and lows for trading.

Today’s rally in the Nikkei must have been a huge breath of fresh air for the BOJ (Bank of Japan). After opening 2% firmer the market went from strength to strength with good volume it eventually closed +7.1% on the day. Banks regained some of their losses from last week with SMFG, Mitsui, Mitsubishi UFJ and Nomura all closing between 8.5 and 10% higher on the day. In China the PBOC (People’s Bank of China) moved the FX rate to its strongest level for a while resulting in a close of 6.4911 1.2% firmer. The Shanghai did show a strong performance towards the close having bounced off of a 2% decline closing -0.6%. However, the Hang Seng did show some positive signs closing 3.1% firmer on the day.
In European trading all indices followed the strong Nikkei with impressive gains of between 2 and 3%. IBEX (Spain) returned an even greater performance (+3.3%) but is bouncing off a very poor showing last week. The one sector that will have been happy with Asia overnight gains will have been the banks! Given the amount of negative press over the weekend, any type of headline could very easily have turned the banking sector back lower. Having taken a bit of a beating last week these guys must have thanked their lucky stars Asia (Nikkei) performed as it did today. Just to be on the safe-side Mario Draghi did happen to mention that the Central Bank is ready to ease policy if market turmoil threatens outlook.

Core Fixed-Income markets traded weaker but also saw peripheral spread trade back-in. The German 10yr lost price (gained yield) to close at 0.30%(+6bp). US cash market was closed but the futures had lost around half-a-point to close around 8bp higher (1.81%).

Gold saw a lot of profit-taking as the confidence returned to stocks and eventually closed $1209 (-2.4%).

Most traders will be looking to the FED again mid-week when we get the FOMC Minutes released. Europe (Germany) has the ZEW confidence data announced and then later we will see UK CPI release (expectations are for -0.7% m/m and 0.3% y/y).

This image ran by USA Today shows how quickly the general public assumes long-term changes in trend are at hand. The general headlines said the public lost confidence in the central banks. The public is losing confidence in everything and we should be off and running with the public to private asset shift when it moves to the political arena next year.

With the USA closed today, gold has fallen back to $1207 to retest the reversal it elected at $1209. Since we closed at 1239.40 (well above that number), you should return to retest it. There are still no indications that gold has reversed the trend. This is true also with the euro. As long as we hold 1164 in gold and 11070 in the euro on a closing basis, we have not reversed back down.

We suggest that you watch “How to Use the Forecasting Arrays“ for basic questions on timing.