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Friday, May 27, 2011

Lather, Rinse , Repeat...

If you take a look at the chart of the DXY, I don’t think it is nearly as pretty a picture as one is being led to believe by the Dollar bulls. Just like the title of this writing alludes to what you find on the shampoo bottles to encourage repeat the process so you to use more than you need, I feel as if the Dollar has eneterd one of these cycles or patterns that we have seen before at other so called bottoms. The dollar has rallied as of late due mainly to the weakness in the Euro as a result of the "Greek Moment" and the rest of the sovereign debt mess. The mess in the US is as bad if not worse depending on which statistics you use, however, I am not looking to get in to that at the moment. The point is that the perception of the dollar is that it is the "sexiest hooker" at the moment versus almost all other FIAT currencies.

There have been a couple subtle marked changes in the Dollar market as I have alluded to in past missives. In the not so distant past when ever there was an event such as a natural disaster, war, or geopolitical event and investors became nervous they ran to the perceived safety of the Dollar and to US treasuries. Today the dynamic has shifted and investors have been running less to the Dollar in times of crisis although many still do. The treasury market is being supported in times of crisis but at this point I have to ask if buyers are not so keen on holding dollars why on earth would they want to hold dollar obligations that are severely impacted by what is going on in the currency.

It is interesting to note that in the last round of crises that occurred the Dollar did benefit, but it was not the sole beneficiary; this time around the Swiss Franc rose as did Precious Metals, particularly gold. The Dollar has been rallying as of late, but unlike many I believe that the Dollar’s problems are more structural and a lower dollar will be the result. Additionally, I believe that it is a privately held goal of many at the FED, Treasury and possible Congress(although I think the vast majority of those in congress are financial illiterates) to have a lower Dollar to aid in inflating away the debt and artificially increasing the GDP to make the debt statistically a smaller percentage of that figure.
Turning my eyes to the dollar, I have created an annotated chart below with what I see going on. Over the past month or so we have been told that the Dollar would rally because supposedly 99% of the people were bearish on the dollar. The statistics I can locate on various trading sides are all pretty bullish with dollar bulls outnumbering Dollar bears on the order of 60/40. The Dollar had spent a few weeks dropping essentially stair stepping down pretty steeply and it had reached a critical point which if it broke below would have lead to a technical crash. No one wants a technical crash, not our trading partners many of whom have currencies pegged to the Dollar nor our leaders as this would unleash inflation in an uncontrolled manner.

When the Dollar punched below 73 on the DXY and recovered above it there was much made of it in the media between the supposed bearish sentiment and the fact that the Dollar clawed back aboe 73  that a “bottom” was in. In my opinion it is a temporary bottom from which a relief rally in the Dollar could take place. The rally from the 73 low does not appear to me to be any more impressive then prior “dead cat” bounces in the Dollar, in fact I would contend that it is weaker than most.
Looking at the chart below I have indicated that there appears to be a head and shoulders top forming and as I am writing this the Dollar is probing the neckline around 75.10. I would not be surprised to see the dollar bounce here over the next week or two possibly getting back up to the low 76 range which is close enough to the long term downtrend line of about 77.50 that there will be selling of the dollar and the rally will fail. If the Dollar fails again the right shoulder will be complete and with the number of short term traders, MOMO players and techies that play in the Dollar’s sandbox this will mean a run back to the 73 area. If there is a dip back to the 73 area the odds favor a continuation to the downside and new multi year lows in the dollar, which would be beneficial for Precious Metals, Oil and other commodities and most equities. The dollar has two things going for it right now. First, the Dollar is still the reserve currency and is also the most liquid and deep market to handle the worlds business. Of course the aforementioned make the dollar a great transaction currency but not necessarily a store of value.  Second, the dollar at the moment is still trading above the 50 Day Moving Average currently a hair above 75 at 75.03 which is providing some support and is also right around the neckline of this evolving H & S top.

On the negative side of the Dollar’s ledger is the fact that it is in a downtrend that extends back many months and as I said earlier that line is at about 77.5 which is where any rally would be met with more selling. Even if the Dollar were the rally further than the downtrend lien there would be significant resistance at the 200 day at 78.04, plus it would burn up a lot of bullish ammunition to get and overcome that resistance. Lastly, the US Fiscal picture is in question, with the debt ceiling and the decisions as to how to proceed forward with getting the debt under control and reducing it. Being an election cycle I am sure we are in for some excellent Kabuki theater from Congress as it wrestles with the issues all the while trying to get reelected. As you can see in today’s headlines the lines are drawn in the sand with the Republicans taking the tax issue and program cutting side and the Democrats doing the 180 degree argument. The problem will get haphazardly patched to allow the US juggernaut to continue down the road, but the can is just being kicked down the road. As we move forward without developing a reasonable plan to deal with our fiscal problems the ultimate solutions will have to be more painful and one of the symptoms will be a lower Dollar in my opinion.
So yes, we could see a bounce in the dollar here and I believe that it will trace out the right shoulder of the H & S pattern as there are still many who want to buy in to this rally. No indicator is foolproof but the technical patterns are suggesting lower prices by midsummer. Additionally, various indicators are more stretched on this technical bounce of the Dollar than all the prior rallies of the past few months. Additionally, if you look at Williams% R or a Stochastic reading they are severely over bought and turning down as the Dollar is topping. Even the Dollar’s MACD reading while positive is beginning to rollover which s never a good sign. As these indicators turn down any rally in the Dollar should be capped as it will not be a strong move. The bottom-line is that I am looking to add to Precious metals again in the mid summer June/July time frame as I believe that the Dollar could weaken the PM complex somewhat until this pattern cause the Dollar breakdown.

 Click on image for larger view.

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