Monday, May 3, 2010

Yesterday's Market

Let's start with the dollar today

Despite a clear uptrend, momentum (a) and the A/D line are decreasing. This is a very interesting divergence, because it indicates the dollar is about to correct. But

the EMAs show the short, medium and long-term trend (10, 20, 50 and 200 day EMAs) are all rising. In addition, the shorter EMAs are above the longer EMAs -- the most bullish orientation possible. S0 -- why the divergence between momentum, accumulation and the overall trend?

Part of the answer is fundamental. The US economy has been printing strong economic numbers across the board. The makes the dollar more valuable. But more importantly, of the three major industrialized currencies (yen, euro and dollar) the dollar's economy is performing the best. Japan is still dealing possible deflation and very high debt levels and the Greek situation which is very euro negative. Consider these charts:

The yen is currently below the 200 day EMA and therefore is in a bear market. All the EMAs are moving lower, indicating the short, intermediate and long-term trend is down. The shorter EMAs are below the longer EMAs -- the most bearish orientation possible. However, this orientation is still fluctuating around the 200 day EMA, indicating it is in the beginning phases.

The euro is clearly in a bear market -- in fact, this bear market pattern is a near perfect example of a bear market -- and is eerily reminiscent of the dollar's chart a few years ago. Notice all the EMAs are moving lower, the shorter EMAs are above the longer EMAs and prices are below the EMAs. About the only good thing about this chart is the volume increase starting in February that could be an indication of a selling climax.

In other words, the dollar is the beneficiary of bad Japanese and European news.

Finally, there is this point:

The dollar is near a short-term high and

Is near the 200 week EMA on the weekly chart.

A strong dollar has incredibly important policy implications. First, it means inflation is lower, giving the Federal Reserve more room to play with on interest rate policy. Secondly, it keeps commodity prices in check. On the negative side, it makes (at some point relative to the other country's currency) US goods prohibitively expensive for the export market.

But perhaps the most important point is this: traders still consider the US currency a safe haven in times on uncertainty.