(Excerpted from our weekly Market Update)
We have been fortunate in the accuracy of our past forecasts of trend changes in the U.S. Dollar Index. The trend in the U.S. Dollar Index is still a major influence on equity prices and commodities. Because of this, investors in any asset class should also remain focused on the Dollar’s trend and be alert to its potential affect on their portfolio. Some of our previous forecasts of Time Windows for a change in trend of the U.S. Dollar Index include:
· October 22, 2009: “We believe the next window of opportunity for a major trend change in the dollar is November 20th through 25th.” (The U.S. Dollar Index bottomed on November 26, 2009, during our Thanksgiving holiday.)
· May 14, 2010: “We expect the (U.S. Dollar) index to peak in the June 01 through June 10 time period.” (The U.S. Dollar Index peaked on June 07, 2010.)
· July 23, 2010: “For the U.S. Dollar Index, the first week of August would be the next reasonable time period to expect an attempt at a corrective low.” (The corrective low occurred on Friday, August 06, 2010.)
In past weeks, our most recent forecasts have warned subscribers to look for a potential reversal of the U.S. Dollar Index’s downtrend during the last week of October or first week of November. With the U.S. Dollar Index once again at sentiment extremes, and both our short and intermediate trend indicators at oversold levels historically found only at past important bottoms, the probability of a meaningful rally starting during our cited Time Window is high. As such, we thought it might be useful to share with our readers some of what goes into the formulation of our time forecasts.
Readers familiar with our work understand that most of our intermediate trend forecasts are based on a concept of proportion; that although there is noise and randomness in the markets day to day behavior, important trend changes are typically made in price and time proportion to past market behavior. This concept is not new. Although it has evolved over the years, its origins can be dated back to at least the very early 1900’s. In fact, illustrated in the chart below is one of those first observations; that many commodities (and currencies) have a tendency to reverse trend in periods of time in which 72 Calendar Days (CD) is a factor.
In the chart of the U.S. Dollar Index below, we have noted six different occasions over the past two years where the Dollar has reversed trend at either 72 Calendar Days, 144 CD’s or 216 CD’s (72 x 3) from previous turning points. This is not a cycle. Cycles are measured from low to low. These periods of proportion can be measured from high to high, high to low or low to low. In order to not confuse this with a cycle, we often refer to this behavior as a rhythm. There are actually several 144 day rhythms within the chart below that we did not illustrate simply because it would have made the chart a bit crowded. In each case illustrated, the red date is the starting date (the “from” date), the blue and magenta dates illustrate 72, 144 or 216 calendar day rhythms that forecasted a multi-week high or low. It should be noted that the August 06, 2010 low is not marked on the chart. This is not an accident; we simply used a different series of common proportions to identify that period for a potential change in trend.
US Dollar Index Daily with 144 Calendar Day Rhythms
The current forecast calls for a potential turning point either in the last week of October or the first week in November. As marked on the chart; Friday, October 29th is 144 CD’s from the June 07, 2010 high. We have other proportions, not illustrated, that suggest a low as early as Monday, October 25th and as late Friday, November 05th, neatly bracketing October 29th in the center of the period. The assumption is that this period would be a low because the U.S. Dollar is in a downtrend, is exceptionally oversold and negative sentiment is at an extreme. However, there is one caveat with time analysis that does not exist in price analysis; the proportions, or rhythm, only indicate that the time period centered on October 29th has a high probability of reversing the Dollar’s direction. The rhythm does not care in what direction the Dollar is trending. If, for example, the Dollar started to rally today and actually advanced for several weeks into this time period, the time period could just as easily mark a rally high. That is not a high probability, but it’s an important concept when dealing with time analysis. In the chart above, the first magenta time period, September 25, 2008 is a perfect example of this potential. The Dollar’s rally in early September, ’08 gave the appearance that the 72 CD time period of September 25th would be a high. Instead, the Dollar reversed sharply in mid month, creating a low near September 25th.
Will This Be the End of the Dollar’s Decline?
Considering that recent investor sentiment readings show only 3% bulls for the US Dollar, and that our intermediate trend indicators are very close to being as oversold as they were preceding the November, 2009 low, the next rally in the US Dollar has the potential to be a multi-month or even a multi-year low. However, allowing for the current political and economic environment, we would not make such a forecast. Even more, a long term forecast is simply not necessary at this stage. What is important is that the public sentiment around the U.S. Dollar is at an extreme level, suggesting investors should expect at least a four to six week rally that is strong enough and long enough to negatively impact equity prices.
Lastly,there is one nagging item that feels different this time. In our past calls of major trend changes in the U.S. Dollar Index (in November, ’09 and June ’10) we felt all alone in our opinion. This time, we most definitely are not. It feels that too many analysts are calling for a major low in the U.S. Dollar Index. As such, our contrarian antennae are alerted to the possibility that the coming low might not be the end of the Dollar’s downtrend, but possibly an important interruption. If the Dollar’s downtrend resumes after the next multi-week rally, or if the period around October 29th does not stop the current downtrend, we would look to December 28th, 2010, 144 CD’s from the August 06 low, as the next Time Window with the potential to end the Dollar’s downtrend.
Matthew Claassen, CMT
Claassen Research, LLC
The information contained in this publication was prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary, or statement of all data. Opinions may change without notice. This report is published for informational purposes only and is not to be construed as a solicitation or an offer or recommendation to buy or sell any financial security. Trading and investing involves risk and past performance may not be an indication of future performance. Claassen Research, LLC and its author accept no liability for any loss or damage resulting from the use or misuse of this report. No Quantitative formula, technical or fundamental system can guarantee profitable results. Reproduction allowed only in its entirety and with full credit to the author. All rights reserved. © 2010, Claassen Research, LLC.
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