Could the dollar be in a new bull market?
By
Dominic Frisby Nov 04, 2009
Print this article
I was at the World MoneyShow in London at the weekend. One of the most surprising things I noticed was just how many companies there were pushing some kind of trading system or software. They must have accounted for well over 60% of the booths there.
Ten years ago, 'charting' or technical analysis (TA) was the haunt of the maverick few. Even now, it's still not accepted by many in the mainstream, particularly in the press for some reason, though that is rapidly changing, particularly as people search for fresh ways of looking at the markets given the current uncertainty.
Some technical tools work better than others, but the simplest are often the most effective. And one simple tool – much simpler than any of the complex pieces of software on show last weekend – could be telling us a great deal about what's going to happen to the markets next.
I'll warn you – it's not pretty...
Drawing simple straight lines on a chart can help identify major trends, minor trends, and mark potential entry and exit points. If you have charting software, it will probably have a line-drawing tool, but you could always use Photoshop or Paint, or even just print a chart out and draw lines by hand with a ruler and pencil.
A warning from the charts
So let's just draw some simple lines on the stock market and see what it tells us. Here's the S&P 500 (see below).
As you can see, a large downtrend has been in place since the highs of October 2008, when the market was just above 1,550. This rally from March took us back to the top line of the channel, but it couldn't get through. As long as that upper trendline is not breached, we have a top in the stock market.
Given the simplicity of that line, 1,100 was a wonderfully obvious target for a top. It's amazing how many mistakes have been made since March – by myself included – wrongly calling the top early. But while that line holds, the top is in.
The suggestion now is that we might go and re-test the lower end of the channel. If so, that would take us below the lows of last March (when the S&P 500 fell to 666), a very ugly ride indeed.
Special FREE report from MoneyWeek magazine: When will house prices bottom out - and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
Let's take a look now at the shorter-term trend in the S&P 500 (see below). We can see that the rising trend line in place since the March lows has also been breached.
In other words, the power of the larger downtrend (see the first chart) appears to have destroyed this shorter-term rally. This might be an opportunity to short the stock market, with a stop-loss in place at around 1,100, just above the large falling trend line that we saw in the first chart.
Another nail in the coffin for US government debt
But it's not just the stock market that's hit a major trend line and reversed in recent weeks. Significantly, in late September, the US bond market did it too, bouncing off the trendline from its highs late last year. Here is a weekly chart (see below). Could this be another nail in the coffin for US government debt?
We all know how in recent times, the US dollar has been the inverse of almost everything else. Gold, stocks and commodities have all risen as the US dollar has plunged. When the US dollar has rallied, as was the case from summer 2008 to spring 2009, everything else has fallen. There has been a strong downtrend in place in the dollar since last March. To say it has broken through that trend line would be an exaggeration, but it has at least breached it (see below).
Looking at a long-term picture (see below), this recent decline in the dollar has not quite brought it back to its lower, rising trendline, so it might have a little further to fall, but we are, as they say, as near as dammit.
So this simple use of trendlines is telling us that a major market reversal may be at hand. The beauty of using trendlines is that, should you be wrong in your analysis and a trend line be breached, you simply need place a stop on just the other side of the line, and your losses are minimised. For example, based on the above chart, you might go long the dollar, with a stop just below 75. We all get it wrong sometimes (perhaps even often). The secret is to keep our costs down when we are.
Is the dollar in a new bull market?
Here's another chart to consider, the US dollar since 1998 (below).
If that lower line holds, you might argue that, despite the falls since March, we are in a new bull market for the dollar. If so, then woe betide everything else.
Finally, I couldn't let a Money Morning pass without mentioning the fact that gold has once again broken out to new highs. It's a nice feeling, particularly as the US dollar also rose, albeit by just a few pips. However, this move in gold is unconfirmed by both silver and the gold stocks, both of which, despite yesterday's rally, are trading below their October highs. This is a potentially bearish divergence, so be careful. A big move down in the stock market could pull everything - including gold - down with it, at least at first.
Our recommended article for today
There are only two forces that move markets: fear and greed. And one fear index is an excellent signal of market direction says Karim Rahemtulla. Here, he explains how it can guide your investment decisions.
Published in
Investments
| More
articles
by
Dominic Frisby
Related articles
-
By Merryn Somerset Webb, Jan 05, 2012
-
By Tim Price, Dec 23, 2011
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.