My Roadmap for Deflation and Inflation

Now that more people have started to discuss the Dollar carrytrade, like the much admired

John Mauldin (http://www.ritholtz.com/blog/2009/11/where-the-wild-things-are/), I thought it could be instructive to use the Elliott Wave context to frame a potential Dollar rebound.

The Dollar is so important because if the Dollar is the right hand of Mr. Market then you have to understand what a Dollar short squeeze will do to the risk trade. The risk trade encompasses ("PEAK-") Gold, Silver, Equities, Emerging markets, Commodities and more.

Back to the (simplified) Elliott Wave context:

Working Assumptions:

1) The USD is in a medium term correction (Wave 2)

2) the correction links 2 bearish impulse Waves, with Wave 1 from 2002-2008 and Wave 3 (2 is our correction) from 2010/11 to 2016 and later which could carry the DXY (Dollar Index) to 45ish

3) The Wave 2 corrrection will not be abnormally structured

What kills this analysis:

1) (asset-)Inflation continues

2) The DXY goes below the 2008 Low (let's say if it goes below 70's that we can scrap this analysis)

Conclusions

1) DXY (Dollar Index) can rise into the 90s (EURUSD falls to 1.15-1.20) or more

2) the Rally / Short Squeeze could run for more than a year (Jan/Feb 2011)

3) The overall market could be captured by another unexpected Asset-Deflation riptide (pls see the S&P 500 & the Silver Charts)

4) Precious metals like Gold and Silver could show some relative strength during the panic (but still will be hit hard!! Gold below $700, Silver below $7)

5) Commodities from metals, oil, agro should experience severe liquidations

6) Watch the solvency of the Banking Sector

The Bright Side

In 2011/2 (or hopefully not later) there will be a buying opportunity of a lifetime for Gold, Stocks, Real Estate which will make all people that kept

some buying power in US$ to instant Warren Buffetts of Value Investing.

Bottom Line:

If the Dollar starts to rally and with each Support/ Resistance Area (see Chart) the Dollar captures, the likelyhood of an Echo-Crash rises.

If the Dollar only bounces mildly and continues the descend to below the 70 territory you want to own hard

assets like Gold, Silver and some international Stocks (not dollar denominated!). This would also be the case where you want to expect rising interest rates.

Given the extreme bearish Sentiment and even more extreme price action (compared to Equities for instance), there is a fair chance that we experienced an

"exuberance" on the downside which normally comes in hand with medium term turning point. The daily Sentiment Index (http://www.trade-futures.com/DsiReport.html) which exists since 1987 has never seen this kind of lopsided extremes in Gold, DXY, Silver in the futures markets. The Commitment of Traders (COT) is showing similar historical extremes. In summary we should expect some kind of a short squeeze rather sooner than later, unless it is different this time.....

Key levels to Watch:

EURUSD: 1.60

DXY: 70

Gold: 1000

This Context should allow all "Deflationistas" and "Inflationistas" to provide a framework to realitycheck their believes. No matter whether You follow a Mark Faber with his "we will never see Gold below 1000" call or a Bob Prechter with his "Conquer the Crash2" view, you now have the roadmap that allows for both!!