US$ index, major top nearing?

Nearer term $ index outlook :

The market is firm near recent highs at 88.40, and levels not seen since 2010.  But lots of negatives are starting to appear and suggests that at least a few weeks of downside (and potentially much more, see longer term below) is nearing.  Note that the market is seen within the final upleg in the rally from the Oct 15th low at 84.45 (wave v, see numbering on daily chart below), technicals which are not confirming the recent upside (see bearish divergence/sell mode on the daily macd) and good offers are appearing at slightly higher levels (characteristic of an approaching peak).  At this point however, there is still no confirmation of such a top "pattern-wise", leaving open scope for more topping and even further but likely limited upside, before such a top is seen.  Nearby support is seen at the bullish trendline from late Oct (currently at 87.55/65, break/close below would increase the likelihood of a top), 87.10/20 and the bullish trendline from Aug (currently at 86.50/60).  Nearby resistance is seen at the recent 88.40/50 high and 88.85/95 (rising trendline from Oct 3rd as well as longer term resistance, see below).  Bottom line : a top (potentially more major top) is seen nearing, but still no confirmation that the final peak is in place.

Strategy/position:

Though there is no confirmation of a top leaving open scope for further highs, any such gains would likely be limited and part of a larger topping.  So seen too late to chase the market higher from here (unfortunately missed previous entry targets), but not yet enough confidence of a top to short.  Remember, positioning is about risk/reward and generally prefer to wait for confirmation of at least a short term reversal before entering.  Won't be catching the exact top or bottom, but the confidence in the position by taking this approach (lower risk, also a level to trade against) makes for a better overall risk/reward.

Long term outlook:

As discussed above, near term negatives are increasing and suggest that a top is approaching.  Note too that lots of longer term negatives are evident and suggest that even more major top (at least a few months) may also be nearing (larger tops generally begin with smaller ones).  These longer term negatives include the market within the final upleg and overbought after the rally from the May low at 78.90 (wave 5, see numbering on weekly chart/2nd chart below), the seasonal chart that tumbles into the end of the year (see 3rd chart below), widely bullish sentiment (contrary indicator) and the market approaching key longer term resistance in the whole 88.70/89.70 area (March 2009/June 2010 highs, ceiling of bullish channel from May 2011, and also coincident with that key 1.2175/25 area in eur/$, see yesterday's email).  But as discussed above, there is still no confirmation of even a shorter term top (never mind a more substantial one).  A final note, as discussed in yesterday's email on $/yen, there is a tendency for professionals to "chase" winners into the end of the year and could lead to a more extended period of a broader topping in the $ index (another month or so) before finally rolling over.  Bottom line : potential rising for a more important top (at least a few months), but still no confirmation "pattern-wise" that the final peak is in place. 

Strategy/position:

With potential of a more major top also forming, looking to also switch the longer term bias to the bearish side.  But need higher confidence of at least a short term peak before switching (would increase the likelihood of a more major top).

Current:

• Nearer term: no confirmation of a top so far but seen close.
• Last: short Oct 21st at 85.25, stopped next day at  85.75 as pullback was not as deep as expected..
• Longer term: waiting for confirmation of at least a short term top to switch bias to bearish.
• Last: bullish bias Jan 6th at 80.65 to neutral Oct 21st at 85.25 (+460 ticks/+5.7%).