U.S. Dollar Index: Bears, the Squeeze Is On
August 8th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
NOTE: I’m posting this ASAP, without this week’s candle close fully printed.
Who? What? Where? Why? How is the dollar going up?
I have no idea, but let’s take a look at the big picture:
U.S. Dollar Index, Weekly Interval
While the larger downtrend is still intact, we’re seeing the dollar attempting to retest the upper channel resistance. Again, don’t ask me how, because I don’t know. Lots of people, including me, thought that the dollar was about to retest the all time low over the last couple of weeks. Lots of people, including me, were wrong.
Instead, we’re getting squeezed here, quite violently.
On the shorter intervals, the dollar looks very strong. While that’s true, look at what’s just overhead. That’s a hard resistance.
The dollar has been beaten down so far and for so long that it has been easy for dollar bears to get lulled into complacency. Anytime an asset starts to look like it’s giving free money away to investors, watch out! Shorting the dollar has been just such a ticket for a long time. Squeezes are pretty easy to pull off.
Now, while I’m of the opinion that dollar bears are being squeezed here, short term, we need to keep a close eye on this now because it has the potential to turn very ugly. I encourage everyone to draw their own lines in the sand.
Here’s mine:
I’m not staying short the dollar if we get a weekly green candle close above that upper channel line.
I know, the snake handling gold bugs and feral dollar bears are frothing at the mouth, speaking in tongues and pulling out what’s left of their hair right now, citing thousands of articles and endless evidence about why the dollar will collapse further. None of it matters. I’ve allocated my money along those lines, but, unlike a lot of these guys, it’s not a religious conviction for me.
I’m content to watch these antics up to that point (top blue line), but that’s it. If the USDX breaks up and out of its long term, down trending channel, I’ll start holding dollars again, instead of trying to exchange them for something else as soon as possible, like I’ve been doing for the last two years. I should have been holding some US$ all along, as a hedge, as per my recommendations on Cryptogon. But I didn’t take my own advice…
I don’t really expect it to break out, but I want to get the word out early so it’s clear: IT COULD HAPPEN. Devise your strategy in advance.
My guess is that there’s a better than average chance that it’s going bounce off that resistance. Why? The weekly stochastic is heading into extreme territory with a hard resistance overhead. Looking ahead a few days to a couple of weeks, aggressive dollar bears who are looking to take on new short positions might have an interesting opportunity there. Above that top blue line, though, watch out.
UPDATE: Gold Longs Hail Mary
Chart pic. The beauty of this is that you’ll know if it worked, or not, really fast!
Granted, it’s in no one’s best interest to have a falling off the cliff dollar. On the other hand, no dollar holder wants to be left standing when the music stops. Technical reason’s aside, why would anyone want to be long the dollar in this environment?
Technical reason’s aside, why would anyone want to be long the dollar in this environment?
Hedge.
if i were to have to wager a why ? on this, my guess would be that there are 3 factors at work here:
1) the powers know that the eurozone’ s credit access and housing problems are going to be at least as bad as ours. This provides for plenty of Euro overvaluation.
2) the euro / dollar play has been too good for too long: as K says, a squeeeze was inevitable, even a profit-taking dcb from these levels could trigger a squeeze.
3) imagine what war in the mideast would predicate: we don’t import all that much oil from there. Europe and Asia do. Visualize the possibilities: the powers could very well be positioning themselves on a last man standing scenario.
crystal ball off.
🙂
cybele
Yeah, and the EURUSD is doing a major WTF. I guess people figure the dollar must be strong because it can bail out so many huge ponzi schemes 😉 .
On another, related, topic: Gold futures are touching the 50-week MA, a reliable support in the last few years (at least). Any thoughts?
I was sitting here with my jaw hanging slack looking at these charts… I started wondering if this is some kind of geopolitical thing, but I think you’ve nailed it to the wall three out of three, there, Cybele.
Gold is just hovering over the strategic $850 support right now.
If you look at the weekly on spot right now, and squint a lot, you can draw a bullish triangle over the highs and lows.
Below $850… Well, oh well. Actually, $845.50 on spot is the last hold out.
Gold is sitting on the support for price level and the 50MA weekly. It’s pretty compelling. It’s the kind of Hail Mary that you’d want to take a screen shot of if it works. Suitable for framing in the Technician Hall of Fame. (If it works, that is.)
Daily stochastic is at 5.
@K – my question was rhetorical. I understand hedging but I was never disciplined enough myself to abide by my stops so I just stopped trading for 1/8’s, 1/4’s and 1/2’s (that should date me) and try now to identify long-term trends and ride them, e.g. long PM’s since ’04. I don’t know about the Aussie/Kiwi markets, but the US markets are so corrupt, I don’t think tech analysis works anymore for anything other than short duration, intraday, trading. This week, I received an email about John Murphy, who, while on CNBC back in ’00 and doing his regular charting q&a, when presented with a gold chart, said he didn’t trade gold because it’s too manipulated. Fast forward to today, and name me a stock/commodity in the US that isn’t manipulated.
FWIW, I’m looking at a daily chart of the EURUSD, and today looks like the biggest red bar (candlesticks, therefore down-from-open) that I can see going all the way back to Oct, 04. Something’s up.
I don’t know what’s going with the dollar either. Makes no sense at all when there is NOTHING but DEBT to give the dollar “value.” So did some debt the U.S. owns just perk itself up and wag its tail and has all of sudden become valuable? Not that I know of. Last man standing sounds like a pretty good crystal ball theory to me. It just doesn’t make sense, this sudden rally.
Its very odd that dollar is rising when Bush is traveling to China. Can you imagine how much his trip just cost the U.S. taxpayer? Mind boggling really. So maybe if the dollar is worth more, the Fed figures maybe it won’t hurt us as much. I dunno.
Grr. That’s the dollar bear in me. Surely, lots of my positions in not-dollar are at break even right now. But until U.S. banks start paying their customers to hold dollars at a rate equal to inflation in prices of food, fuel, etc, I’m going to fugged about changing my position.
I don’t think that U.S. banks, given their own situations of debt and what not, can even afford to pay their depositors the piddly shit interest they are paying them now. What’s that? 3% per cent max on a CD for 5 years? Give me a break.
I’m staying put even if the squeeze is on.
Seems to me with the dollar moving up that the Fed has finally reached a point of desperation. Nothing else they’ve tried has worked, so lets boldly go where we really don’t want to go.
Beam up the dollar, Scotty.
Mystery solved:
http://goldmoney.com/en/commentary.php#current
“On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.
So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others. So central banks pushed in one direction and funds and traders then stepped on board. In other words, central banks ignited the fuse of a bear market rally.
With this intervention, central banks have bought some time. But alas, they have not fixed the problem. Central bank intervention does not make the dollar “as good as gold”, the description that once accurately described the dollar.”