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The Market Breakdown - Issue #1

The Market Breakdown - Issue #1
By Christopher Inks • Issue #1 • View online
Your weekly macro look at the markets, news, and even trade ideas!

The Tape Reader’s profits should develop naturally. He should buy or sell because it is the thing to do – not because he wants to make a profit or fears to make a loss.
― Richard D. Wyckoff, Studies In Tape Reading
This is the inaugural issue of The Market Breakdown, a free weekly newsletter where I will be sharing my macro views of the markets, commenting on the news, providing education, and taking a look at charts that are of interest for the week. Don’t forget, we are having a huge giveaway of over $30,000 in prizes to celebrate TWC’s 4th anniversary, so be sure to enter for your chance to win a nearly impossible-to-get PS5 or Xbox Series X, $5000 in Bitcoin, or a biannual or annual TWC Tier 3 membership!
In this issue...
  1. The Macro Environment, Reverse Repo, and Dollar Liquidity
  2. Is gold telling us something about liquidity?
  3. Bitcoin’s local and long-term charts; NFTs, DeFi, and the SEC
  4. The Stock Indexes
  5. Oil
  6. Financial Term of the Week
  7. Trade Ideas
  8. 3-Day FREE Trial plus 42% off an Annual Tier 3 Membership
  9. My Live Stream Schedule
  10. Recommended Resources
- : Macro Environment : -
The Fed’s Reverse Repo (RRP) facility continues to take in $1T+ per day as shown in the Fed’s chart below.
Overnight Reverse Repo Agreements
Overnight Reverse Repo Agreements
The result of the RRP is that cash is pulled out of circulation and this is supposed to help create a floor for short-term rates (front-end yield curve control). But as Bloomberg noted, “The pressure pushing down overnight rates toward zero is proving a major headache for money-market funds. It hampers their ability to invest profitably, and can lead to further disruptions as they begin to waive fees to avoid passing on negative rates to shareholders….‘Supply and demand technicals remain an overarching driver of rates, and with the supply and demand gap now having grown to $1.35 trillion, it’s not surprising that the Fed’s ON RRP is providing only a soft floor for money market rates,’ [said JPMorgan Securities strategists Teresa Ho and Alex Roever].”
Notice that they mentioned it’s only providing a soft floor. This is because the available supply of T-Bills has declined as a result of the debt ceiling imposed by Congress which has limited issuance, the demand from major banks, and the Fed’s asset purchases. We can see this playing out in the 1-month T-Bill yields which have dropped this year.
1-Month Treasury Bills Yield
1-Month Treasury Bills Yield
We also know that Commercial Banks’ loans and leases are showing a YoY decline. Even though that number has started to rise over the past few months, it still remains well below the previous year. Furthermore, with the Delta variant of Coronavirus exploding everywhere, it could lead to a widespread slowdown, if not shut down, of businesses again. This would necessarily result in a reduction in loans and leases once more.
Loans and Leases in Bank Credit, All Commercial Banks
Loans and Leases in Bank Credit, All Commercial Banks
Commercial banks are obligated to pay interest on their customers’ deposits, but the lack of lending means that the only way they can do so is to purchase U.S. T-Bills with those deposits. However, as stated above, there is a dwindling amount of Treasuries available in the market. As such, the Fed is likely to see a continued increase in the use of their RPP facility as banks are forced to use it to obtain the treasuries they need. But this doesn’t fix the problem, it only temporarily keeps it from getting substantially worse. What is needed is an increase in bank lending to coincide with the increasing liquidity that results from QE.
Even if the Fed does begin to taper in November, it will likely be at such a small rate that it will have minimal effect. The Fed is currently purchasing $120B/month and they are considering a taper of only $15B/month. All this means is that we would see $105B/month of liquidity injected into the system rather than $120B/month. In other words, liquidity will continue to rise. This liquidity remains with the primary dealers, banks, and money markets. It does not circulate throughout the economy.
If history repeats itself, then the current collateral shortage may lead to another dollar shortage, similar to what we saw from 2014-2017. Compare the following three charts:
RRP Agreements 2014-Current
RRP Agreements 2014-Current
DXY 2014-Current
DXY 2014-Current
Gold Futures 2014-Current
Gold Futures 2014-Current
Notice that the rise in RRP coincides with dollar shortages that lead to a rise in the value of the dollar. Simultaneously, it results in a decline in the value of gold. If this coincides with an economic down turn, the result would be disastrous. I don’t see how we could avoid a deflationary spiral at that point as the collateral shortage leads to a dollar shortage which results in an increase in the value of the dollar thereby making U.S. debt more expensive to pay, and that would lead to a run on dollars causing the dollar to rise even faster.
Might there be a recent warning in gold? Around August 9th, starting the end of the week preceding, we saw a drop of about 8.5% in the price of gold.
Gold 8.5% drop
Gold 8.5% drop
The chatter going around is that an institution wasn’t able to provide enough T-Bills. As a result, there was a sudden liquidation of collateralized gold. And if this is true, then it may be a warning of stress within the system.
The situation doesn’t look too good at this time. With the growing Delta variant threat, it could get a lot worse even faster. The astronomical highs hit in the stock market don’t make this any better as any sign of weakness that persists is likely to see the indexes drop like rocks and send market participants running for the hills thereby feeding a potential deflationary spiral.
- : Crypto : -
For those of you new to the cryptocurrencies market, it is important to understand that Bitcoin is the bellwether for the rest of the market. If Bitcoin is doing well, then we can generally expect alts to do well, since a rising tide lifts all ships. However, the same can be said in the opposite direction.
Last week, we saw Bitcoin drop suddenly which caught many leveraged traders off-guard and led to a liquidation of more than $2B in long positions in a span of about 20 minutes.
However, if you were following me on my public live streams, then you knew to be cautious as we were following a possible local Elliott Wave count but I also mentioned that traders should be wary around the daily R1 pivot. This caution was proven to be warranted because that is where the drop initiated. Many people paid attention and locked in their profits before that drop. But is that it for the decline? Or is this the beginning of a larger move down?
Bitcoin's Weekly Elliott Wave count
Bitcoin's Weekly Elliott Wave count
The weekly Bitcoin chart shows a strong possibility that price is in the early stages of wave 5. This fifth wave has a minimum expected target of $96,000 and a possible secondary target of $154,740. Could price extend its rally even higher? Yes. But, in doing so, it will print an overextended wave 5 so we will need to follow the wave development as price continues to rally.
In the chart above, you may have noticed the black ranges drawn at the all time high and then at the lows of the decline. These are Wyckoff ranges which denote distribution at the highs and reaccumulation at the lows. Together, they complete a specific type of range called “reaccumulation after decline.” This interpretation of the chart supports the Elliott Wave narrative.
Bitcoin's Daily Wyckoff Ranges
Bitcoin's Daily Wyckoff Ranges
As noted in the Wyckoff labeling, either the Back Up to the Edge of the Creek (BUEC) completed at the lows of last week’s drop or it has a bit further to go. I’m leaning toward it needing to complete one more drop lower into the blue daily demand structure in the 38500-39500 range. However, before it does, I believe we may see it rally to the blue supply structure in the 48200-48600 range.
Considering the sobering macro possibilities mentioned in the previous section, I would expect this to be the final run up before an extended bear market for cryptos (if those possibilities play out). For traders, this isn’t an issue because we don’t care about price direction, only that price moves. Money is to be made in advancing and declining markets.
Might all of this coincide to a top for NFTs and Defi? For a quick explainer of NFTs check out the Verge’s article and CNet’s article. I’ll admit, I don’t know what the long-term viability of NFTs is, but I have been late to the party before on new technology. That said, I do believe whatever the long-term viability is, the current hype does appear overly-exuberant and very frothy. If Cointelegraph is right and DeFi needs NFTs and NFTs need DeFi then the frothiness in NFTs may mark a top which would bleed over into DeFi and could coincide with an overall market top.
Adding to all of this is the SEC’s apparent plan to attempt to regulate the heck out of the industry. Max Dilendorf at Dilendorf Law Firm PLLC lays out some great thoughts about the possibility of NFTs being treated as securities. And while the initial reaction of most crypto traders/investors is to argue about how antiquated the SEC and laws pertaining to securities are, the fact remains that the law is what it is and will be applied as the SEC believes it should be. So it behooves traders and investors to really pay attention and try to understand the arguments rather than stand around posturing and arguing about how unfair they believe it is.
- : Stock Indexes : -
The past week wasn’t good to the stock indexes as they appear to have possibly topped out. The weekly NASDAQ Composite chart below shows us that last week printed a bearish engulfing candle, carrying price back into the ascending wedge after it printed an apparent throwover the week before. In red, we can see a Chuvashov Fork which shares confluence with the wedge’s support. A break down below that ascending red support/wedge support may indicate that the top is in. Further local confidence can be added with a break down below the 14423.16 level.
NASDAQ Composite Weekly Chart
NASDAQ Composite Weekly Chart
Similar to the NASDAQ chart above, the S&P E-Minis weekly chart shown below also printed a bearish engulfing candle last week. The Chuvashov Fork on this chart is a bit lower, but the requirement is the same - a break down below the lower tine of the fork will indicate that the top may be in. The break down below 4029.25 will add some local confidence to that idea.
ES E-Minis Weekly Chart
ES E-Minis Weekly Chart
Finally, the Russell 2000 Index chart below may be even more compelling. We can note that it has been printing a range for 180+ days now. I believe we may see a break down below the range low and, in doing so, that will signal the beginning of the drop. Price may get a rally out of the blue weekly demand structure, but will get rejected at the range support if it does. This will lead to a more significant drop, once the demand structure support is lost, that should see price hurtling down toward the weekly pivot in a relatively short period of time.
Russell 2000 Index Weekly Chart
Russell 2000 Index Weekly Chart
- : Oil : -
When it comes to the economy, traders and investors always watch the oil charts. They do this because we will often see signs of a struggling economy showing up in the price of oil. If the economy is doing well, then the price of oil generally tends to rise. If it’s not doing well, then it generally tends to decline.
WTI Futures Daily Chart
WTI Futures Daily Chart
It looks like oil has printed wave A of its advance off the May 2020 lows. Locally, price should be done with, or nearly so, wave ((b)). A break down below 67.12 should indicate that wave (©) of B is in progress toward a minimum expected target of 57.25. However, further decline below that level may indicate that wave ((a)) is actually only wave (i) of a larger wave ((a)). This would give us a minimum expected wave (iii) of ((a)) target at the 46.00 level.
Financial Term of the Week
Reverse Repo -
A reverse repurchase agreement conducted by the Desk, also called a “reverse repo” or “RRP,” is a transaction in which the Desk sells a security to an eligible counterparty with an agreement to repurchase that same security at a specified price at a specific time in the future.
FAQs: Overnight Reverse Repurchase Agreement Operational Exercise - FEDERAL RESERVE BANK of NEW YORK
What is the repo market, and why does it matter?
- : Trade Ideas : -
The MASK/USDT pair recently broke out impulsively above the descending resistance. This signals that wave ((iii)) is likely in progress toward a minimum expected target of 36.300 or secondary target of 43.110. We may see price continue to pull back toward the 9.879 level. But a break out above the swing high at 13.937 will indicate that price has resumed its rally toward the wave ((iii)) target. A break down below wave ((ii)) at 7.424 will invalidate the count and this trade.
BAT/BTC W1 Chart
BAT/BTC W1 Chart
Another great setup is this BAT/BTC chart. Price broke out above the descending resistance earlier this summer. This indicates that wave 3 is likely in progress toward a minimum expected target of 0.00015740. That will equate to about a return of about 814%. Locally, a break out above 0.00002395 will indicate that price has resumed its rally toward a minimum target of 0.00005075 or secondary target of 0.00005940. A break down below wave 2 at 0.00000576 will invalidate the count and this trade.
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Recommended Resources
TexasWest Capital - When you’re finally tired of throwing away your money in the markets and are ready to learn how and why the markets really move like they do, as well as how to take advantage of that movement, then this is the place to be. We offer the most comprehensive market trading education found anywhere, as well as tons of trading opportunities every week for our Tier 3 members, and an incredible trading community.
Phemex - Take charge of your trading fees! Solid trading platform that allows you to trade contracts or spot. If trading spot, you can pay a flat monthly fee to make as many trades as you want; no more paying commissions on your spot trades!
MotiveWave - Are you ready to move into the big leagues as a trader? This is one of the most comprehensive charting platforms around, giving you much more flexibility and tools, but still without the steep learning curve that other advanced platforms require. Get a 14 day FREE trial. This is what I use on a daily basis for my personal trading.
TradingView - Need an extremely user-friendly charting platform? Then this is your go-to! Not as robust as MotiveWave, but it combines the right amount of flexibility and tools with a very shallow learning curve so you can be up and charting in no time at all!
YouTube - The official TexasWest Capital YouTube channel. I simulcast live streams with our Twitch channel.
Twitch - The official TexasWest Capital Twitch channel. I simulcast live streams with our YouTube channel.
Twitter - The official @txwestcapital Twitter account.
Facebook - The official TexasWest Capital Facebook page. We have recently retrieved it from Facebook and will be posting regularly once again.
Instagram - The official TexasWest Capital Instagram page. We have recently retrieved it from Facebook (they own Instagram) and will be posting regularly once again.
TWC Book List - People are always asking me what books I would recommend. Here is a list of books that I have read and would encourage others to read in order to get a greater understanding of the markets.
Christoper Inks is a macroeconomist, educator, and veteran trader of over 25 years. He holds multiple degrees including a BIS focused on economics, finance, and political philosophy, MS in Applied Psychology, MS in Homeland Security with a focus on governmental decision making, and a J.D. with concentrations in corporate, tax, and emerging technology law. He is a student of cycles and Socionomic Theory, especially as it relates to finance and the markets. Christopher currently holds a Level 1 CEWA certification and relies on Elliott Wave and The Wyckoff Method to understand and forecast market movements.
The views and opinions expressed in this newsletter are solely those of Christopher Inks and are not financial advice, nor do they constitute an offering of financial instruments or investment advice. Investments and trading are inherently risky. Always be sure to conduct your own research and analysis before making a decision, and never forget to practice proper risk management.
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