Those of you who are familiar with my work know I’m a serious proponent of the time element of technical analysis. In the past few months we’ve done some serious work with the US Dollar. Since the movement of the Dollar is so vital to the movement of the stock market, it makes good sense to really understand what the Dollar is doing.
Since the crash, the Dollar and equities have been moving in an inverse fashion. It hasn’t always been that way and at some point in the future it won’t be that way again. But in the past few months the relationship has started to decouple. On any given day, the Dollar will still be up as the stock market is down. But if you’ve noticed both are higher since November. But as I’m writing this, the Dollar is up on a day the market is down.
So why is it the market is so frightened of a strong Dollar? In simple terms, the market fears deflation. One of the conditions necessary for a serious deflation is a huge debt burden. As a country, we have it but as consumers we also racked up billions in what became known as the sub prime mess. The problem is that much of the real estate debt that was put on the books materialized between late 2003 and 2007. As we know it was an easy money era where the Dollar steadily depreciated and was trading in an approximate range of 90 to 81 during that time.
It also turns out that the 90 handle is the 38% retracement of that bear. I’ve done a presentation in
If you take a chart like
But we are not out of the woods yet. These 2 charts have been driving the Dollar action since November. You see the median lines on the monthly chart stopped the downslide and dictating the move up. You can readily see where the intermediate term downtrend lines can stop this rally. Right now that line is from 83-85 depending on how quickly we get there. Since my headlights only go so far as those downtrend lines, we won’t discuss what will happen if those are violated. I will say that if they are violated, that is the only time you will really have to concern yourselves with a serious decline in the stock market. The reason I even trust that line is the fact the mid line stopped the downtrend. The logic is that if one line gives us a valid test, another part of this median set can also.
On a daily basis you can see how well this median set has helped Lucas Wave International to navigate this important chart. The fact that the high in February was up 6.1% and had a geometric reading (.173 derivative of 1.73 root 3) off the secondary January low and not the real bottom suggested to us that February 19th could not be the top. That bit of new information was confirmed on this date as the Dollar set a new price high above February 19. The brown lines simply set the course for the latest pullback on the hourly chart.
At this point in time, the stock market is also at a key cycle point in time. In terms of trading days, the end of March marks the 618th trading day off the Dow top in October 2007. Since the NASDAQ topped 3 weeks later, the end of the month also marks the 610th (Fibonacci) trading day off the NASDAQ top. Day 618 in the NASDAQ does not kick in until the second week of April With all these time windows so close together, this is bound to be a very volatile period. As the Dollar is close to its upper median resistance on the daily chart again, the downside everyone is looking for in the stock market may be muted.
What will we need to get a final top in the Dollar? It would require a good price and time cluster at an important resistance level. We haven’t had that yet.