Time to Run With the Bullish Dollar
Keep an eye out for weak US Dollar reversals that are likely to occur around target areas.
Summary of Friday's Notable Technical Developments
Bonds: Longer-dated Treasuries were largely unchanged Friday as they continue to be range-bound. The benchmark 10-year Treasury yield has been trading between 3.75% and 3.85% for the last two weeks. This has coincided with a pause in the dollar; the DXY has mostly ranged from 77.50 to 78.25 for the last three weeks. Both 10-year yields and the DXY moved higher in tandem for the first two to three weeks of December. It will be interesting to see if this directional correlation continues as the DXY was under pressure late Friday and over the weekend. Factors at play here include, but are not limited to, economic growth forecasts, inflation expectations, uncertainty about future Fed activity, and concerns about the federal budget deficit. Adding to the mix will be new supply from the US Treasury this week.
Stocks: Down for most of Friday, stocks then rallied hard in the last hour to finish positive. The NASDAQ led the major averages with a gain of nearly 0.75%.
Commodities: Gapped lower Friday, but like equities they rallied back. In the first five trading sessions of this year, commodities as measured by the DBC are up 3%, slightly outpacing equities.
US Dollar: The DXY ended another volatile session lower Friday, but still right at short-term support at 77.47. The DXY is down about 0.50% so far this year and will surely be tested in Monday's session as Friday's weakness spilled over into the weekend.
Important Update on the DXY (130-Minute Chart)
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If the DXY breaks down below 77.47 on a closing basis, there's important support at 76.73.
Market Internals: NYSE
(Figures are rounded)
Critical Market Components (with ETF proxies):
S&P 500 (SPY): Short-term support is December 31 low of 1114.81. More substantial support comes in at the 75-day moving average of 1088.47. Meaningful resistance is just above Friday's close at 1146 -- a significant Fibonacci convergence level. The next resistance above that is 1156. The SPY has corresponding support levels of 111.39 to 108.21 and resistance comes in at around 116.
NASDAQ (QQQQ): Support for the NASDAQ comes in at 2292 and then 2271 below that. The next minor resistance comes into play at 2331 (March 2007 lows) and 2340 just above that level. The QQQQs have support at 45.75 to 46.25 and resistance in the 48 area.
Dow Jones Industrials (DIA): Support remains at the breakout point of 10,507 with 10,450 providing additional support below that; resistance comes into play at 11,000. For the DIA, resistance comes in at 111; initial support is at 105.
10-Year US Treasury Yield (TLT used here as a proxy for longer-dated Treasuries): Resistance for rates on the 10-year Treasury is right here at the 3.8% to 3.9% range and support is still down at the 3.6% level. These levels translate to support for TLT at 89 and first resistance at 90.
Commodity ETF (DBC): The DBC has resistance beginning at 26.73 with 26.86 (the 50% retracement level of the wave 3 move lower that ended in March of 2009) just above that. Support for DBC is now the 25 breakout point with additional support at 24 below that.
US Dollar Index (DXY and UUP): The range for the DXY remains 77.47 to 78.44 on a closing basis. If the DXY breaks down below 77.47 on a closing basis, there's important support at 76.73 (see chart above). This trading range translates to 22.80 as support and 23.20 as resistance for UUP -- the ETF proxy for a rising dollar.
Semiconductor Index (SOX and SMH): The SOX managed to close above its short-term resistance at 366.52 (Fibonacci projection) -- that level now turns into first support; secondary support comes in at the horizontal line at 332.11. The next meaningful resistance comes in at 384.28 (bottom of first wave lower from July 21, 2006). These levels translate to 30.31 as resistance and 28.43 and 27.50 as support for the SMH exchange-traded fund.
Bank Index (BKX and KBE): The banks broke out above the 44.82 trading range resistance and are now poised to test the 52-week high at 49.28. The broken resistance at 44.82 now becomes support. The KBE exchange-traded fund has support and resistance at 22.59 and 24.40.
Crude Oil (USO): Short-term support for crude comes in at $82. Meaningful resistance doesn't come into play until $83.94 with additional resistance at $85. USO support comes in at around 40 now while its resistance is 41.92 and 42.56 above that.
Gold (GLD): Resistance for gold will be tested today as gold traded higher overnight. Resistance on a closing basis begins at 1143 with 1169.10 above that; support starts at the 50-day moving average at 1126.28 with more substantial support at 1075. Support and resistance translates to 110 and 111.91 respectively for GLD.
The US Dollar Index (Monthly Chart)
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- This is where my analysis begins, with a monthly DXY chart going back 20+ years.
- According to my wave count, the DXY is in the early stages of the c wave of an abc corrective move higher that will comprise wave 2 of a five-wave move lower. That means that this c wave could/should deliver a higher DXY (up to a max of 91.25), with a big down move to follow.
The US Dollar vs. Japanese Yen (Monthly Chart)
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- This monthly chart of the US Dollar/Japanese Yen currency cross confirms what the monthly DXY chart is telling us; expect short-term strength in the greenback as it completes its corrective move higher, but then intermediate/longer-term weakness in the dollar should prevail during a strong third wave move lower.
- In terms of wave count, the USDJPY appears to be in a wave ii of 3 of V higher with another strong wave (iii) lower to follow once the upside target area around 98.956 has been tested.
The Euro vs. US Dollar (Weekly Chart)
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- As with the DXY and the USDJPY charts, the Euro/US Dollar chart above paints a picture of short-term strength for the dollar to be followed thereafter by intermediate to long-term weakness.
- The EURUSD is in the midst of a wave iv of 1 of V correction lower that should have a max downside of 1.40272 (downside in this cross means strength in the US Dollar). The fifth wave (wave v of 1 of V) higher should take the EURUSD up to around the 1.66 level.
- So again, I'd be advocating staying with bullish dollar plays for the time being, but with an eye out for weak US Dollar reversals that are likely to occur right around our target areas.
- Besides trading currencies with this information, investors would do well to position their equity and commodity portfolios accordingly. Longer-term dollar weakness will certainly impact the equity and commodity markets.
- Investors should wait for short-term strength in the greenback to play itself out before entering long-term buys in "weak dollar" plays such as foreign equities, foreign fixed income, and large-cap multinational US equities.
- Favorable sectors in a long-term weak dollar environment should be technology, infrastructure, agricultural, and food plays. A portion of investable assets should be placed in safe-harbor plays such as gold and the Japanese yen.
Strategy: Stay with bullish US Dollar plays for a while longer until either a clear reversal occurs or until the short-term targets are met (91.25 on the DXY; 98.956 on the USDJPY; and, the 1.40272 level on the EURUSD); once that occurs, barring any unforeseen and exogenous events, I'd advocate taking longer-term positions in "weak dollar" plays as mentioned above.
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