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Currency Currents

Tue, Oct 14 2008, 16:59 GMT

Black Swan Capital

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SPECIAL ISSUE:  We are sharing the latest Chart Summary issue we sent to our Members earlier in the week. If you like what you see, consider becoming a Member of one of our advisory newsletters.
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Is the dollar due for a correction?
 
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. 

We will be looking to play for a dollar bounce on any signs early during the opening in the Asian session on Sunday.  In fact, we may be recommending some stop-entry trades before the open so please stay tuned.

Key Horses We May Want to Ride:
• USDJPY long (JY futures short)
• Aussie long
• Euro long
Key Crosses for extra horsepower if the technical setups we lay out prove correct.
• EURJPY long
• AUDJPY long

Dollar Index Weekly:  We believe the bottom is in!  Any correction must hold above 7431 to support this count! The long-term trend line going back to January 2002 has been broken decisively.  
 

Dollar Index Daily:  Looking a bit extended daily basis, as it is above its trend channel.  A slight divergence on the Stochastic, as seen at bottom of chart i.e. new high in the price but not a new high in oscillator.

Key Resistance:  8327, 8406, 8490
Key Support: 8137, 8041, 7955, 7863 [critical is 7431]

Stocks, Dollar Index, and Commodities now very tightly correlated: In the daily chart below, we have inverted the US dollar index (red line) so you can better see the tight visual correlation i.e. as stocks and commodities fall, the value of the dollar rises…
 

…thus and reprieve on the stock or commodity side of the fence i.e. oversold bounce, would likely lead to a dollar correction…

Dow Jones Industrial Average Monthly:  Take a long view of the Dow, you can see a couple of things.  First, measuring from the 1987 crash low, the DJIA has retraced right on 50% of the distance.  Second, this 50% retrace also corresponds with the secondary trend line going back to the recessionary low in 1990.  So, just maybe stocks find some support in here.  This chart is not to suggest the bear market is over.  It only gives us some technical reasoning at least to suggest an oversold bounce higher in stocks may be due.
 

Oil Correlation Continues Tight:  Below is oil vs. EURUSD daily…

…so, is oil due for a bounce?

Crude Oil: The daily a-b-c count objective has been achieved.  Looking for a bounce…
 

USDJPY Daily:  The quintessential risk currency—the yen.  A big key day reversal on Friday and looks extremely oversold.  Eventually we expect it to go lower, but a bounce seems due.  This may be one horse to ride on a correction (or maybe the EUR-JPY or AUD-JPY cross).
 

USDJPY vs. S&P 500 Index 240-min: 

EURUSD Weekly:  Testing a key support area!  A retracement from the 2006 low (62%); trend line support; and chart point support are all converging near the 133-level.
 

EURUSD Daily:   Resistance: 13443, 13787, 13867, and 14057   Support: 13261, 12868
 
 

USDCHF Daily:  A bit of shakeout of the Swissie as risk aversion play on Friday.  Will it now trade again with the euro?  Key resistance is at 11489.  Watching!
 

Swiss franc futures Daily:  Appears oversold and we know where the low is—where we will be wrong by being long.  Key support at 8728!
 

GBPUSD Daily: We believe the pound goes a lot lower eventually, but appears extremely overextended here.
Key Resistance: 17068, 17448, 17698, 17918
Key Support: 16790, 16570, 16139

USDCAD: It is just amazing how fast $-Cad has surged in such short period of time.  We do want to get long on any correction (see weekly chart next page).  It appears quite overbought now…but…

USDCAD Weekly: 
 

AUSDUSD Daily:  It is hard to believe the Aussie has fallen so far so fast!  From its high near 9850 in mid-July, it has plunged a stunning 34.7% to its close on Friday.  The risk-reward potential in catching a correction here is very good.  At the low, 6331, we are likely wrong.  But a standard Fibonacci bounce would carry it several hundred points higher from here.
Key Resistance: 6942, 7271, 7565, 7803
Key Support:  6331, 6044
 

AUDUSD Weekly:  Extremely oversold, but all the air may come out of the Aussie in a global recession that drags commodities prices lower over time. 
 

Regards,
Jack and JR

• Black Swan Capital Currency Currents 14 October 2008

Published on  Tue, Oct 14 2008, 17:07 GMT