Yesterday’s Dollar Index indicated signs of bottoming. If that’s confirmed, the dollar could move up sharply from that bottom because the over-leveraged dollar bears will have to cover their positions.
Technicians know that when prices break out above the down-sloping trend line from the March high of 89.62, it suggests that the rally could continue, which would provoke more dollar buying.
The initial Dollar Index resistance surrounds 77.50, the former break-down level. But if there is big short-covering, prices could easily jump over this resistance level.
All investors should take into account that the other important impact to a dollar bottom is its implication on all the other markets that have been moving opposite of it.
The start of a major dollar rally should roughly coincide with a downturn in stocks, commodities, oil, and precious metals.
So, take care, under the actual circumstances, a rising dollar would mean most of the rest are down.
Besides that, also important is the fact that the yield of the 30-year U.S. Treasury is moving up. When we look at how the wave’s structure develop, the yield should move further up to plus-5 percent before it ends.
As long as the yield doesn’t fall back below 3.88 percent, the up direction toward a plus-5 percent yield will remain on solid ground (123 to 125 basis on the daily continuation contract).
Yes, near-zero interest yields for the short-term Treasuries and slowly but nevertheless growing, higher yields (plus 5 percent) for the longer-term Treasuries, is where we’re going first.
We’ll see what happens after that.
As you know, I’m convinced that we have seen a bear market rally since March.
Yesterday, the Morgan Stanley Europe strategy team said to its clients and before the dollar started moving up: “Is it worth trying to capture the upcoming last ±10 percent of a ±70 percent rally? We feel we are in the latter stages of this cyclical bull market, before the period of indigestion that typically occurs when the tightening phase starts.”
They added that: “We recommend investors use significant further market strength to position for the next phase. In the aftermath of secular bear markets these tightening phases could last for four quarters, while markets fall by 25 percent; 2004 was a benign version of such a tightening period, and even then it lasted for two or three quarters while markets fell 8 percent.”
They advised that: “Our best guess is that this tightening period will start before summer 2010. When everyone wants to sell, you accommodate them and buy. When everyone wants to buy, you accommodate them and sell. Don’t try to get the last 5 percent. Don’t be greedy.”
I would like to add, profits in the pocket are the only real profits. Of course, everybody does what they think is best.
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