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$ index, stay long....for now...

Wed, Sep 3 2008, 05:59 GMT
by David Solin

FXA

No change in the view on the $ index as the market is overbought after the sharp gains since July, with potential rising for at least a few weeks (or more) of consolidating lower after. However, as pointed out in the Aug 26th email, the nearer term upside pattern is not “complete” leaving open scope for further gains first. Bought there (then at 77.15), and the market has indeed pushed to another new high within wave 3 in the rally from the Aug 21st low at 76.05 (see numbering on daily chart below). Though this continues to target at least some further highs, it may be a period of upward ranging/ topping ahead versus a sharp move higher from here. Note too that technicals are not confirming the recent highs (see bearish divergence on daily macd at bottom of chart below), adding weight to the view that further upside may be limited. So for now, would stay long, using a close below the week long bullish trendline (currently at 76.85) as a sign to stop. However, will want to raise it much more aggressively on the inability to accelerate higher over the next few days/week. Note had been using a close below the multi-week bullish trendline and though it traded below, it never closed below.

Longer term no change as the market remains within its broader period of upward ranging with eventual gains toward 79.00/25 (38% retracement from the Nov 2005 high at 92.60), and possibly above favored ahead. However, there is some risk that the last 6 months of gains are part of a larger correction with eventual declines below 70.70 after, while the market is nearer term overbought after the sharp gains since July (see shorter term above). So even if longer term bullish, not seen as the time to just chase the market higher for the longer term (versus waiting for this period of correcting lower to enter).
Longer term support is just below 76.00 (both the previously broken ceiling of the nearly 3 year bearish channel and the previously broken ceiling of the bullish channel since March, see weekly chart/2nd chart below).

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Published on  Wed, Sep 3 2008, 06:02 GMT