Cycles repeat – just like clockwork – and, in spite of the on-going bull-bear debate, price eventually aligns to the dominate cycle. That being the case I am optimistic that the U.S. dollar is in for a short-term bullish run. Let me explain. Words: 808
So says ‘ReadTheTicker’ (www.readtheticker.com/pages/Blog1.aspx) inthe aboveparaphrased comments from an article* reformatted and severely edited […] below by Lorimer Wilson, editor of www.munKNEE.com, for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. ‘ReadTheTicker’ goes on to say:
Market analysts must give respect to cycles just as they do inter-market analysis – the study of a market (say the U.S. dollar) that has a high correlation or influence over another (say the stock market) – and in doing so they must consider the dominate cycle of each market to see if they concur or conflict with other markets that they correlate with. That being the case let’s take a look at what cycles are unfolding for the U.S. dollar and the DJIA and how they affect each other.
The U.S. Dollar Cycles
As you can see from the above chart the dominant 214 week cycle looks very healthy. The only thing I would note is that the latest peak in 2010 was not as high as the previous peak in 2006 and the same is true for the trough in 2008 versus the trough in 2004. These variances suggest – ever so slightly – that the cycle influence has diminished ever so slightly. The 60 week cycle has sprung back into life from 2008 to now swinging up and down between peak and trough with very good amplitude and phase, whereas previously, between 2003 and 2006, the 60 week lost statistical accuracy. (If you are lost with the terminology please check out our website and learn more about Hurst Cycle logic and the use of our proprietary RTT Cycle Finder Spectrum to determine both of the above 214 and 60 week U.S. dollar cycles.)
We concur with Carl Weinburg, chief economist at High Frequency Economics, who maintains that the Europe debt crisis is a ‘bomb that is about to go off’ which is why we believe it is highly likely that the U.S. dollar will rise following the 60 week cycle up between now and May 2011. The 214 weekly cycle suggest that any price rally up the 60 week cycle in early 2011 should be shorted into for the long ride down of the U.S. dollar into 2013. The shorting of the U.S. dollar mid-2011 is on the table as you can see that the last two rallies in 2008 and 2010 in the U.S. dollar sold off hard.
To quote the classic TV show Hill Street Blues “Let’s be careful out there”. Why? Because the big gorrilla in the room – the U.S. stock market – may fall drastically in the near future ( respected cycle analyst Charles Nenner has called for Dow 5000 by 2012) and a falling stock market will bring about a ‘flight to safety’ with massive buying of the U.S. Dollar. The U.S. dollar has been the primary carry trade in recent years and, as such, there are billions of dollars around the world chasing risk and a risky environment will see a liquidation of these carry trade investments and the buying back of the U.S. dollar as monies return to the USA. That being the case, accepting a long term bearish stance for the U.S. dollar is not a sure thing.
The DJIA Cycle
The COT Chart of the U.S. Dollar
The chart below of the CFTC Commitment of Traders (COT) report for the U.S. dollar shows that the large speculators and commercials are extremely bearish. Therefore, any significant euro debt story will most likely cause these positions to unwind, or buy U.S. dollars. The next three months will be very interesting. The $64,000 dollar question is ‘Do you think the euro debt crisis will remain benign in the immediate months ahead, or not?’
The flip side to the bullish U.S. dollar case is that the 214 week cycle crushes the 60 week cycle, the euro debt crises remains benign, and the U.S. dollar trends much lower without so much as 10% pullback. We don’t think any of those scenarios are going to play out and, as such, eagerly await price action confirmation of the U.S. dollar bullish case.