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PIK

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Reply with quote  #1 

The longer term technical condition of the dollar is constructive and favors continued higher prices on an intermediate term basis.  Just wanted to highlight here some of the resistance the dollar is currently up against as it is testing some longer term price congestion areas and bottom side of a previous t-line.  Any failure at resistance could see a pullback into the noted support zone which includes the neckline from the inverse H&S pattern as well as the newly formed rising bottoms t-line.   There is also a decent amount of previous price congestion in the support area. 

 

In addition, commercials (as of 11/04) are not all that excited about the prospects from this immediate area.  I don't have anything more recent, but more than likely their stance has not changed significantly. 

 

Bottom line, the dollar is technically in good shape for further price advancement over the intermediate/long term.  Short term, odds are starting to favor a pullback that should be viewed as an additional buying opportunity for traders with longer time frames as long as the noted support zone holds.  Any pull back here could also provide some short term upside potential in Gold and gold stocks.  Any break above the noted resistance is continued bullish action. 

 

For those that prefer funds, Rydex recently came out with 2 funds to trade the dollar.  

 

2 charts attached. 

 

 

 

   

 

 


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mortiz

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Reply with quote  #2 

Chuck,

 

The strong/weak dollar Rydex funds' asset flows have a short history, but by checking out the asset flow charts on DecisionPoint, it appears there is a lot of bottom fishing on the weak dollar fund.  Despite the relentless downtrend of the weak dollar fund price, asset flows have been rising.  Conversely, the Rydex strong dollar index price has risen to new recovery highs (like the $USD), but the Rydex dollar speculators are not buying into the rally, based upon the lack of asset flows into the fund.

 

As you noted, fresh $USD COT data will not be released until Monday.  Tom McClellan uses a rather complicated approach in measuring the $USD COT commercials data, including the net long/short commercials positions as a percentage of open interest, as well as factoring in weighted commercial's COT data for all currencies.  As of the 11-4-05 data, the McClellan $USD commercials indicator is still suggesting higher prices for the dollar going forward.  

 

So from a sentiment perspective, prospects look good for a continued rally in the dollar in the IT.

 

From a stock market health perspective, the bulls will not want to see the $USD rally too much, particularly a significant move above 100.  Below is a long term chart comparing the fortunes of the SPX when the $USD is above or below par, i.e. 100.

 

Over the past 35 years, the $USD rising above 100 usually results in rough sledding for stock prices.  The glaring exception was between 1981 and 1987 when the dollar and stocks enjoyed robust price appreciation.

 

The theories for the 1981 to 1987 anomaly between a strong dollar coinciding with strong stock prices are many, and Fib presented a few plausible reasons earlier this year when the topic arose.

 

In 1981, interest rates finally topped around 16% for the 10-year yield, finally bottoming in early 1987 at around 7%, with the $USD finally falling below 100. The 10 year yield then rose nearly 50% to 10.25% in October 1987 (with the help of AG hiking rates in August 1987).  The $USD popped above 100 for a while beginning in August 1987, then fell below again, with stocks crashing two months later.

 

Other than the extraordinary relationship between stocks and the $USD in the 1980s, a USD below 100 is good for stocks, thus a rally in the dollar above 100 going forward will serve as an important warning for stocks.

 

 

From a price pattern and sentiment point of view, it appears the USD has more upside potential in the IT.  However, for the stock market bulls, any robust rally in the USD taking it above 100 will likely have a negative impact on equities.

 

FWIW

 

Randy

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PIK

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Reply with quote  #3 

Hawkeye, something else to consider is this flag pattern with gold, will need to wait for any strong move for any confirmation (chart below). 

 

Randy, good info on the history of what happens to equities when the dollar gets above 100.  Also, I am not familiar with Tom McClellan's COT formula, but was curious if you know if the current divergence it is showing with the more popular method is the exception or rather the rule, just trying to get an idea how much of a difference it shows with other COT information as well. 

 

 

TIA


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tooearly

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Reply with quote  #4 
why is everyone so sure of the inverse gold dollar realtionship at this juncture?
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mortiz

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Reply with quote  #5 

Chuck,

 

Tom McClellan granted permission to post on TW the following USD COT commentary excerpt from their 11-4-05 daily McClellan Market Report (MMR) edition.

 

Keep in mind the COT data addressed in the MMR commentary is pushing two weeks old due to the holiday delay in COT reporting last Friday.  But the approach Tom and Sherman employ for COT data analysis is explained.

 

"Our final chart shows our composite indicator derived from combining the commercials positions in all of the currency contracts contained in the COT Report. We adjust each of these positions for the specifications of their contracts to reflect the size of the net dollar position, relative to the overall size of all currency futures contracts. This week saw a slight up move in the U.S. Dollar Index to its highest level since May 2004. At the same time, the currency futures traders backed off from their fairly big net short position seen last week. It is as if the smart money is realizing that there may be more upside yet to come for the dollar, especially if the new Fed chairman continues the pace of short term rate hikes.  We have commented before about our hypothesis that there is a bull market range and a bear market range for this particular COT indicator. We have a hard time testing it back before late 1999 because the introduction of the euro currency made a fundamental change to the way that the entire currency market works. But it is our hypothesis that during a bull market phase, this indicator stays in a range between around -10% and +30%.

 

During the 2002-2004 bear market in the dollar, this indicator stayed in a much lower range. The return to the higher (more net short) range earlier this year was an indication to us that the bear market in the dollar had ended, and that we were back to a bull market range for this indicator.

 

We bring this up in order to point out that there were several instances in 2000 when this indicator pulled back from a comparatively high net short position while the Dollar Index kept on rising. That was a bullish indication then, and we believe it to be a bullish indication now. For the long term, that is bad news for gold prices, because a rising dollar tends to be hurtful to the dollar price of gold. That does not prevent gold prices from seeing a pop from oversold over the next month or so, but it tells us that we should continue to expect gold prices to be in a longer term downtrend."

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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PIK

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Reply with quote  #6 

 

Just a quick update on the Dollar chart on the first post, short term, support has held.  Important test here over the next several weeks for the Dollar as both resistance and support are clear.  In addition, I wanted to highlight Randy's observations of $USD and stocks with the quote below.  Worth watching as we move forward.  Break above resistance and we should see 97 at a minimum.  Break below support should see a test of 87.         

 

 

"Over the past 35 years, the $USD rising above 100 usually results in rough sledding for stock prices.  The glaring exception was between 1981 and 1987 when the dollar and stocks enjoyed robust price appreciation".

 

 

I also wanted to wish everyone a happy holidays and especially thank all that have taken the time to post their analysis and trades, it is appreciated.   It takes effort and courage to do so.  In addition, I want to wish everyone a happy and prosperous new year.

 

Best regards.

 

Chuck

 

  

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peregrine

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Reply with quote  #7 

Another bullish ingredient is that the seasonal tendency in the USD points higher through most of March.


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bobalou

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Reply with quote  #8 
just a bear idea.if the bonds brake down,the $ could take a hit.and oil,gold ,silver ,etc.move higher, and time wise the rt shoulder is not right,or we could be in a trading range
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mortiz

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Reply with quote  #9 

Happy New Year Chuck!

 

Thanks for the buck update and great to hear from you again, miss your valued contributions on a regular basis.

 

Looks like stiff resistance immediately above for the $USD, but one cannot deny the longer term bullish reverse head & shoulders pattern.  Sooner or later the reverse H&S will be important.

 

I don't collect COT data for the $USD, and haven't seen any updates lately on where the commercials stand with the buck, but I notice the Rydex "weak" USD fund is far more popular right now than the "strong" dollar fund with the Rydex universe of traders.  Thus from that limited sentiment perspective, negative bets on the $USD by small traders seem in vogue right now.....

 

Have a happy and profitable new year.

 

Randy

 

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