Thursday, April 14, 2011

Friday Dollar Analysis

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On the multi-year chart, notice that prices spent over two years consolidating in a triangle pattern, with strong support at the 22 level. Now prices have clearly broken through that level. Remember an old traders adage that the longer the basing formation, the strong the move out of that pattern. Should that play out here, we would have a strong move lower in store.

On the shorter chart (6-month), notice the clear lower low and lower high pattern. All the EMAs are moving lower, the shorter EMAs are below the longer EMAs and prices are using the EMAs as technical resistance. This is a great example of the most bearish possible chart out there.

The technical indicators tell us that money is flowing out of the market (the declining A/D and weak CMF reading) and that momentum is extremely weak. These simply add to the bearish case.
Over the last week, we've seen the dollar form a bit of an island pattern indicating a bounce into the EWAs might be in the cards for the coming week. However, any move higher should be considered a shorting opportunity.

Adding all of these factors together, we get a chart that is fundamentally very bearish in multiple time frames. The multi-year chart shows prices breaking lower from a long consolidation pattern, the 6-month chart shows prices in a lower low, lower high structure and the technical indicators are all bearish. This is backed by the fundamental background.

1.) Other countries are raising rates, making their economies more attractive as a place to park short-term investments.
2.) It appears that US growth is slowing. This is adding to the bearish analysis.
3.) The long-term budget situation is still at best murky.
4.) There is concern about inflation, and whether or not the Fed is behind the inflation 8-ball.

However, over the next week or so, don't be surprised to see the dollar rise. Why?

On the chart notice that prices have gapped lower on slightly heavy volume. A rebound into the EMAs is possible at this level.