Stock Market Rally and Economic Recovery Blowing in the Wind

Stock-Markets / Financial Markets 2010
Mar 28, 2010 - 10:56 AM

By: Steve_Betts

“You’ll notice that Bush never spoke when Cheney was drinking water; check it out!" Robin Williams

We are seeing some interesting developments in the markets so I want to jump right into it and save all the social and political commentary for the end. I would first like to focus on the US dollar since it is the hot topic of conversation in the media, and its price movement is subject to a lot of misinterpretation. The general line of thinking espouses a new bull market for the greenback given the fact that the US economy is on the mend.

As you know by now I don’t believe the economy has bottomed and I certainly don’t buy into the idea of a new bull market for the greenback. Yes, we are experiencing a reaction and it’s one of the largest to date since the dollar topped in 2001, but that doesn’t mean it’s a new bull market. Whenever you want to see the big picture in a market, it helps to get away from the here and now, and the best way to do that is with historical weekly or monthly charts. Here I have posted a twenty-year weekly chart and I would like you to take a look at it:



The obvious thing that sticks out is the massive head-and-shoulders formation with the neckline coming in at 80.35. This is a formation that took the better part of twenty years to complete and included a bull market top in 2001. Since the top was put in we have seen a sustained move down that produced two lower highs (short horizontal blue lines) mixed with reactions of 10% or more. Today we are in the midst of a third reaction and I am convinced that it will also produce another lower high. Recently the US Dollar Index moved back above the neckline but that happened with the previous reaction as well so you shouldn’t read too much into it. A week ago the US Dollar Index also closed above strong resistance at 81.32 and closed out the week at 81.60. The dollar is not yet overbought on any chart (daily, weekly, or monthly), but it is close. I suspect that sometime within the next week or two the dollar will test strong resistance at 83.35, it will become extremely overbought as it does so, and we’ll see a top in that area. With that said there is still good resistance at 82.41 to overcome and it could also produce a top. Thursday’s intraday high at 82.24 came very close to testing the latter support level and I would look for another test this coming week.



Why is the dollar so strong? I normally don’t concern myself with the “whyâ€