Wednesday, May 5, 2010

US Dollar Index -- approaching resistance

The US dollar has had a nice run, and I am super certain that this is just the beginning of a new "Strong Dollar" era (I hear that giggling in the back!) but in the short-term the Dollar Index is approaching the intermediate target I presented two months ago. below is the text of the March 5, 2010 letter in full (typos and all, but charts omitted).


Trend & Value
March 5, 2010

The forex market is a riot these days. A riot as in really funny, I mean. But before long, actual rioting will start to spread, and the World (Ex-North America of course!) will devolve into a Mad-Max Trilogy type spiraling institutional collapse, except in this case the 'juice' in shortage won't be petroleum (plenty to go around), but rather Credit and its corollary – Trust. Now in the Olden Days, when a piddling country got into an external debt problem the bankers with money on the line arranged for a military force to be sent in to set things straight. Call me crazy for presenting it this way, but something analogous to this is in the cards in Europe. And Greece (or any other country) isn't going to get out of this currency union by just dropping the euro and reverting to drachmas or whatever. The bond holders aren't just going to stand by and let the unit of account all the debt is denominated in magically change. Not only would the direct losses be intolerable, but the underlying liquidity structure of the Continent's banking system would collapse. Even if there is some mechanism written into the rules to allow for such a currency reversion, and I haven't looked into it yet, I don't think it will hold up in court. For one thing, most of this debt was likely originated in euros, not the previous national currency. A quick search of the net informs me that the average maturity of Greek debt, for example, was only 7.8 years (as of 2009). So it would appear that at least a fair majority of the debt was never denominated in drachmas to begin with. So in my mind it is doubtful that an exit from the euro is feasible for Greece, or any other country with a debt-load. But the bailouts that are in the works should do the trick, right? Actually these are just replacing the pressure from external creditors with pressure from the internal population. I have no special insight into Greece, never even been there, but everywhere else I've been in Europe I've noticed that the sense of entitlement runs rather strong. If people get the sense their access to free shit is threatened, they'll get violent. Hence the reference to rioting at the beginning of this piece. Any number of these esteemed social democracies could collapse over a holiday weekend. At that point, do the 'business interests' bring in a strong man? Or does a supra-EU force need to be brought in to restore order? (And make sure those debt payments continue – which brings us back to the scenario alluded to above.)
Then you can ponder what kind of shenanigans a crackpot country like Turkey, or perhaps Russia, is liable to pull once Europe starts to destabilize....
Many, if not most, of you are rolling your eyes at me, right? None of this is very likely, you say. Well, think what you want, but I can assure you that something will happen (always does) and the odds are that that something isn't going to be pretty.
Let's look at a few charts of the US Dollar Index, because I think I've found the next price target for the index.
The index has stalled out the past few weeks. Just taking a little break. Meanwhile, the medium-term moving averages are turning higher and a solid looking web of averages is forming in the 77s. So if momentum really breaks down, we'll look for support around 78 or 77.5. But really, I'm doubtful this is going to roll over too hard, if at all. Maybe some more sideways consolidation, with a dip towards 79. But a dip like that is going to get bought, if it even comes. I'm pretty sure the dollar's going higher again before too long. Let's move to a weekly chart.
Notice we are butting up to the same resistance above 81 that was encountered last June. That's fine. Typical even. I am now looking to just under 85 as the next target on a break above 81.50. May calculator is giving me 84.73 as the precise number, but I am seeing 85ish as what you might call a 'concealed resistance' point. It's not completely hidden, but it's not going to be obvious to very many people. 84.73 is just the Middle Ratio retracement (68.2 per cent) of the decline from 89.62 to 74.23,
but I like it because that's right where the failed consolidation last spring broke down, and also a few of the weekly candles hit the level before that.
Always good to look at the long-term picture too, so below I include a monthly chart.
See how many times the dollar index found temporary support at about 85 over the years? Next to ~80 it looks like the most important former support level. Plus, that 88 week moving average is right there now.
So just as ~85 was temporary support in the past, my guess is that it will prove to be temporary resistance here soon. We'll move higher than that after another consolidation, but it's the best next resistance point I can see right now.
As for the other markets... I like Treasurys (as reiterated in the last report). I'm skeptical about the US stock market, but we are already seeing new highs for the small- and mid-cap indexes, and I'm not seeing much indication of an immediate down-turn in the S&P 500 either. If you want to short the market, you could try selling into strength here, but I'm not sure where exactly these indexes are going to stop. I'm looking into it, but so far nothing has come to me. I mention the possibility of some double tops at the beginning of the week, maybe it'll be the S&P or the Dow that double tops? Dunno, but something to keep in mind.
I am much more bearish on commodities, commodity related stocks, and international stock indexes/ETFs, but this stuff too could trade sideways or anemically higher who knows how long. The China Story has kinda faded from the news the last few weeks hasn't it? Can't wait for that riot to start up again.
Have a good weekend,

... I liked writing that newsletter, dammit. Too bad I didn't do what it takes to make it a viable business..