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Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Technicals Suggestive Toward a Lower Dollar  1 comment
    May 7, 2009 5:05 PM | about stocks: UUP

     

    -May 7, 2009

    Many analysts have predicted that while the massive amount of stimulus and the growing money supply may indeed prevent us from going into a depression, but it is also likely that in the near future, this is likely to be very inflationary. Furthermore, most economists have really been ratcheting back the recovery expectations; pushing recovery further out, and assuming more anemic growth. Under this scenario, it will be increasingly difficult to fight inflation because the Federal Reserve will be less likely to raise rates, and it will be much more difficult to sell the loans they have bought off of bank balance sheets (thus taking dollars out of the market, shrinking the money supply).

    So using this scenario as our fundamental framework, the charts also seem to reveal some weakness creeping in. In this example I've used the UUP dollar bullish etf. First we can see that although we have a raising trend, we also appear to have declining peaks. Each peak corresponds to one of the major bottoms in the stock market, which makes sense; people fled stocks and other risky assets and sought shelter in relatively safe assets such as the dollar. Despite the overall rising trend, we can see momentum continuously falling since the October slow motion crash. Furthermore, this trend line, in place for 10 months or so, should be given extra credence since it closely coincides with the 200 day simple moving average, a long term support line. This trend line has now been penetrated, and we may be on the verge of a breakdown.

    Chart 1: UUP - Daily Periods - 10 months    

    If image doesn't appear click here for original image: docs.google.com/Doc

     

     

    Lastly, I would like to also point out the first red circle, were the dollar violently traded lower. This was the day the Fed announced that they had been purchasing treasuries. This was obviously extremely negative for the dollar, but this trend of buying treasuries and devaluing the dollar is something that may continue into the future. The Government has basically paid for the recovery efforts by selling treasuries, this will eventually push up yields because with so much debt on the market, eventually buyers will want higher yields. Since the Fed can no longer lower interest rates, what it can do is buy treasuries, keeping the yields down. And round and round we go. However, this is good news if you are betting the dollar will decline in value, since as the Fed make more open market treasury purchases, this puts more money in the system, pushing the value of the dollar down.

    Summary: The charts seem to be leaving evidence that the dollars run may be coming to an end. Furthermore, the actions of the Fed and Treasury also appear to be a fundamental reason for the dollar's value to be declining. The most likely risk to this idea is that the stock market may correct in the near term, once again bidding the dollar up as people seek relative safety. However, we can see that each successive sell off, there has been less and less buying of the dollar. Furthermore, I have found that when such long term trend lines are penetrated, it is meaningful, even if there is a short term pull back.

     

    Disclosures- at the time of this writing, I have no long or short positions in the UUP, or any other dollar currency pairings.

    Stocks: UUP
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  • Bill L.
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    Author’s reply » There were some technical issues trying to get the chart up, so I just put the link to goolge docs where I have the chart uploaded. Sorry about the inconvenience.
    7 May 2009, 05:35 PM Reply Like
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