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Is the dollar due for a correction?

Tue, Oct 14 2008, 15:40 GMT
by Jack Crooks

Black Swan Capital

Of course we wouldn’t ask the question if we didn’t believe the chances are good. But, the major caveat is the same we’ve shared before—in a fundamentally-driven market (or major event-driven) the technical analysis takes a back seat. So, we do our technical work, but keep in mind this is a market of breakout trades lately i.e. no matter oversold or overbought sell or buy the breakout has worked.

We also have to consider that we are at a level on the US dollar index, as shown below, where we just might get what we refer to as “major capitulation” to the trend by the perma bears. It seems they are starting to come round to the idea that this dollar move is not just a bounce. Given the still rather subdued level of open interest in the currency futures, it suggests there is fire power on the sidelines.

What might be the catalyst for a dollar correction? We think even a short-term breather in the risk averse environment would do the trick. Maybe the coordinated efforts by the G-7 this weekend engender some confidence. But the catalyst will like be higher stock prices i.e. risk appetite or at least near-term risk reprieve. If stocks continue to get whacked, then the dollar likely continues to defy gravity and major capitulation becomes very real. [The continued pound lower of the industrial metals, such as silver and copper, suggest major recession is on the way and stocks go lower even if a bounce materializes short-term.]

Again, we think this will likely be temporary, but it could be a sharp move that could be very worth playing. The good news of trying to play a correction here is the fact that it won’t take long to figure out if we are right or wrong i.e. a decent risk-reward setup we think it is.

The next several pages are some key daily and weekly chart setups that we believe give some weight to the view the dollar is due for a downward correction to digest some of its recent gains.

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Published on  Tue, Oct 14 2008, 15:45 GMT