Here’s why I expect the Dollar to liftoff
FX:
Since breaking above the “Key” level we pointed
out back in September the dollar index has chopped sideways for five weeks.
Despite the larger correction in USD/CHF this morning, the fact that USD/JPY
continues to power higher has translated into the dollar index sitting tight at
89.90.
On October 27 we wrote, “On the day gold hit $480
we said it had topped and to look for a drop to $460 before a bounce off of that
support. Yesterday we said we thought a move to $475 would complete an ABC type
rally off of that support. If you haven’t taken 1/2 profit yet, this is the area
to do so – at $475.”
The subsequent selloff in gold is right on target
to setup a large head and shoulders pattern, but only if gold makes a sustained
move below $460. As such, we continue to expect dollar liftoff in the coming
weeks as a break of the neckline in gold would suggest a larger decline
targeting $425 was in order. This would coincide with a larger degree inverse
head and shoulders pattern in the dollar index that could propel it to the
95/100 target area we have forecasted since last year.
Therefore, we continue to think our EW count
below showing “waves 1 and 2” are complete is correct. Only a move below the
“Key” level at 88.40 would undermine the bull case. But it will take a move
above key resistance at 90.75 to see some fireworks.
Stocks:
Long term yields continue to rise in line with a
bottom in the 30-month cycle reached last month. We continue to expect that a
regime of tighter money will weigh on the stock market. But stocks must head
lower from here or risk making the decline from the August highs nothing more
than a correction.
Recall that the correction we were looking for
has slightly exceeded our upside target range at 1205. We’ll need to see a close
above here to convince us that the wave count is wrong. Until then we have to
acknowledge that the bulls think they have gotten through the worst and are
ready to take the market higher.
The market has a range of about 5% with massive
resistance at 1245 and major support at 1165. Only a move through these levels
changes the outlook to outright bullish or bearish.
We think the overlapping nature suggests this is
still a correction. But the bears must take charge here immediately and drag the
S&P500 below 1165 or face the prospects of giving the bulls a strong base to
rally from. As such, we will need to see a clean break of 1165 to get the
downside rolling.
Bonds:
No change: The 10-year yield surged from 4.38% to
a high of 4.6% at the open. This took us above the key 4.5% level and is
encouraging to our view that global bond markets have topped.
Recall that four weeks ago we said to watch the
30-year bond as the T-bond was in jeopardy of breaking down with a move in
yields above 4.6%. The rally to 4.8% this morning is a clean break after
crashing back down to the breakout level at 4.6% last Friday. We remain bearish
on bonds since turning that way three weeks ago.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.