The Dollar looks set for a sharp decline
Last Thursday we wrote
that the reversal higher in the euro “looked like it would end Friday with back
to back weekly bullish reversals thus setting up the possibility of a sharp
decline in USD over the coming weeks, contrary to our initial expectations.”
In the chart below we show how two false breaks of weekly
trendline support and the ensuing bullish weekly reversal sets up the strong
possibility that this is a simply “five wave” move from the November lows. Most
telling was the typical “wave 4” move that did an “ABC” type correction with
that long tail and reversal to end it.
As readers well know, we are loathe to buy EURUSD for the many
reasons we have stated over the past six months. However, our proxy for euro
strength all along has been to be long AUDUSD and short USDMEX. As you also know
we look to buy USDCHF on weakness to create a hedged portfolio. This strategy
has been good to us for both positive roll and inherent dollar weakness, and has
apparently been more successful than many of the “proven” fx strategies run by
the biggest funds over the last couple years.
While traders may use this information to go long EURUSD, the
one reason we have been reluctant to give an outright bullish call on EURUSD is
that Europe is still a bad currency to invest in, has a negative carry and is
very crowded by the hedge funds. We still think this is an accident waiting to
happen and therefore much prefer long AUDUSD which is why we added to this in
June near the 0.73 lows.
As we said last week, “We think a move below 1.23 in USDCHF
and we think that the chart pattern suggests a move down to 1.18/1.17 is in
order.” The slip below here this morning means that there is no change in our
view on the dollar index as USDX remains tied to the fate of the euro. With the
rally back above weekly trendline support at 1.27 the dollar is now setting up
bearishly for the near term. A break below 85 would confirm a near term bearish
scenario.
Gold: Gold may be in “wave C,” but a move above downtrend
resistance crossing just overhead could see another attempt at the $730 highs.
Recent strength has tested our view that we may be in “wave C”
following a strong “wave B” bounce that rallied off of our support zone at
$540/$580.
Recall that while wave C down may be underway, we view this as
another opportunity to position long (similar to our view when “wave A” ended).
This is because we expect the correction from $730 to end the larger “wave II”
pullback followed by a soaring “wave III” rally.
As we have said for months now, “In the broader picture, this
long awaited correction is underway and recall that a top here at $720 will mark
the end of “wave 1 of V” meaning a pullback to $580/540 would be “wave 2 of V”
followed by an explosive rally in “wave 3 of V” to new all time highs.”
Stocks: Last week we warned that a move above downtrend
resistance at 1280 would be near term bullish. Prices have since stalled at
1,290 and we think traders could go long on a move above here as prices would
likely target the 1,330 highs.
But as we have said time and again, “The market is extremely
optimistic that a peak in the Fed cycle will see a lower dollar and higher
stocks. Unfortunately, history says the exact opposite.” Therefore, we are more
inclined to go short from the 1,330 level and add to that upon a break below the
1,240 lows.
As such, the move above downtrend resistance around 1,280
might incite the bulls so we think traders who went short from the 1,280/1290
area last week should tighten up stops to the 1290 level and wait to go short
again if this area holds back the bulls, or at 1,330. Add to this upon a
sustained move below 1,245, but we do not favor going long the US stock market
from current levels.
Bonds: Our bond forecast has been impeccable, as we have
called each of the little twists and turns and pivot points. Since prices have
effectively pushed through channel resistance crossing at 105.50, just as we
forecasted, this suggests that a larger rebound is underway.
We continue to see a rally to 107/109 followed by a renewed
decline below 104. The reason is that 104 will be a tough nut to crack the first
time around and the majority of players are already extremely bearish on bonds.
Crude Oil: No change: Crude oil reached our minimum upside
target at $78/$80 last week thereby fulfilling the “wave V” rally we said to
expect back in February. The 23% advance has made some subscribers very happy
and we commend you for jumping into this market as you well knew that hedge
funds were short back at $60.
The pullback from our technical target at $78/$80 tested
trendline resistance and has since rallied. But with tensions in the Mid-east
our target may not mark the top. The reason we say this is that Crude on a
weekly chart looks like it may go “parabolic.” While impossible to pick when a
commodity will extend like this spec positioning allows for hedge funds and
hedgers alike to buy buy buy.
As we said three months ago, “While not expected, an “extended
fifth” wave would mean that this is just the first leg up within a larger move.
That seems unlikely, but the implications are that either we could top out at
$78 or possibly at $82. A prudent move would be to take some profits there and
wait for a pullback to add back to longs in the hopes of higher highs in the
$82-$92 range.”
Therefore, traders were encouraged to take initial profits at
the $78/$82 range last week and to now either tighten up remaining stops or buy
back in here at trendline support. If we do get a spike, a move to $90/$100
would be were we look to cover and possibly reverse.
Recommended long at $55 last November. Still looking for a
move to $80-$100 over the coming months.
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.