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On the Brink of an Asset Explosion

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Unsuspecting investors won't recognize the market top and will get sucked down into the depths of the bear.

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The recent move to new highs by the Russell, Mid Caps, and NASDAQ suggests that the third leg of the bull is now underway. As most intermediate-term rallies last 20-25 weeks trough to trough and this rally is on week 4, we probably have at least 10 to 15 weeks left before we can expect a top.


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Now keep in mind that this has transpired while the dollar has been rising. As a matter of fact, the dollar is the key element in what I'm about to suggest.

So next, let's take a look the dollar.


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I've marked the last two major three-year cycle lows with a blue arrow. Now to understand where I'm going with this you need to understand the concept of left and right translated cycles.

A left translated cycle is a cycle that tops left of center. For instance, if the rally out of a three-year cycle low were to top out in less than 18 months we would consider it left translated. Generally speaking the majority of cycles that top in a left translated manner move below the prior cycle low.

You can see in the chart (above) that the three-year cycle that began in December of '04 did in fact top in less than 18 months. As expected it broke to new lows at the next three-year cycle low in '08.

We're currently in the same position in this three-year cycle as it has obviously topped in a left translated manner. As such, we should expect to see the dollar break to new lows by the next major three-year cycle low due sometime in 2011.

Now if we zoom in a bit I'll tie this together with how it relates to what I think is brewing in all asset markets.

There's no doubt the rally in the dollar over the last three months has been violent (the most violent rallies occur in bear markets). However, as you can see from the chart below, so far the dollar hasn't been able to move above the peak of the last intermediate cycle.


Click to enlarge


We now have a failed intermediate cycle in the making. If the dollar fails to break the June '09 highs and continues to roll over, it is in jeopardy of succumbing to the secular bear trend again.

Next I'm going to note that last week was the 14th week of the dollar rally. The intermediate cycle in the dollar rarely lasts more than 20-25 weeks so not only is the dollar getting deep into an intermediate cycle and in jeopardy of topping at any time but it's also contending with the multi-decade resistance level at 80.
No positions in stocks mentioned.

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