USDi update 22Aug - combined format

USD index update
(now in combined format)

The USDi continued its upward breakout of the down channel to a new recent high of 83.30 and now sits above all daily EMA's. On Wed evening it tagged the 61.8%Fib retracement (of the recent breakout leg up) at 82.0 which is significant to me, as this was also the 200EMA on the daily. At the very least - unless the next move up fails at 83.40 (unlikely, but it is a daily resistance line) - this might be an ABC up correction (similar now to the EU movement down, shown below) within a larger overall down trend of the USDi. I suspect then this week will see more minor damage to the equity markets with the USDi target for C upleg being at least the length of A - which is a minimum of 85.1 for the USDi within the week.

The issue becomes - is this simply a USDi/EURO correction, or is something more problematic brewing? There is still the gap left at 81.0 which might provide a clue, as one day it will be filled. Currently the USDi trend is firmly upwards having now been confirmed by continuation through 82.80.

Presently, failure below 82.5 would restore buying into equities as the USDi trend has broken down. The USDi broke through the 61.8% Fib of the recent 2010 bull run at 83.20. A failure here remains bearish with a break now below 82.0 being below the daily EMA's again - but this is not likely now, daily indicators showing upwards with the USDi.

(USDi daily chart) - clickable


The daily indicators RSI (breaking 50) and Stoch (above 0) suggest this rally will continue (is not overbought on either), so concern is real for equities with USDi moving into the danger zone with the USDi now above all daily EMA's.

Daily USDi chart on stockcharts.com - click here

(USDi hourly chart - updated retaining previous trend lines)


Targets - 85.1 minimum; not sure if divergent tops in the RSI and Stoch's on rising USDi will show. Projected Fib indicated as an estimate. Daily MACD is below zero still, indicating this might just be an ABC correction only. Winks/WnL might comment on this?


THE COMPOSITE MAJOR PAIRS
According to my estimations, construction of the USDindex from the major pairs is roughly as follows - EURO 35%, CHF 35%, GBP 15%, JPY 10%, others 5%


EURUSD - now short for next week, in an ABC down

In reference to some EWave goings on regarding a possible ABC wave down (appendix below), an alternative to my previous update (thinking it was entering wave 4) - last week might have just seen B corrective up wave (in ABC down), which would mean C wave is yet to complete. Since C = A as a minimum EU has more downleg to come. Even if this is now a 5 waves down movement (1,2 just completed), then the EU will go below this projected level as C is not the shortest wave.

At this stage I'll go with ABC leg down - EU is now in C leg.


EU 1hour chart


As noted last week, I didn't fall in love with the rally in the EU from last weeks low as it bounced off 1.273 on Monday morning. Staying short EU now would be the trade IMO. This strengthens the USDi in an opposite ABC upwards. If correct then, does this establish that leg A down finished equal with leg 4 - being the double bottom noted last week?

Targets - thinking only bearish for EU in a C leg down (assuming it is C)
C target = 1.234 (min), 1.198 (max) (in any case of either 5waves or ABC)

(now looking at this as a complete 5 waves to 1.333)
1.261 is the 50% Fib retracement of the recent 5 waves up, would be a shorter target
1.222 is the 23.6% Fib of the recent 5 waves up

USDCHF
The UC is in no mans land after it broke down below 1.037 to 1.027 - which puts it nowhere. It should continue sideways for the week in a new range within a high of 1.04 and a low of 1.02.

I continue to assume the UC is setting up the pattern for underwriting the direction of the USDi - which is further down (CHF getting stronger) in my opinion. But for the USDi to go lower after the current ABC corrective wave up then UC would need to at least hold, or go even lower on a rising EU. On the daily UC, a low of 1.012 is not unexpected which would allow this.

If the UC rises, it will cancel any effect of the EU rising and the result is USDi will hold steady. This will then show us if the equities are following the EU trend or the USDi proper. More time is needed to reveal this, but I suspect UC up with EU up giving a sideways USDi.

If the UC returns up and while the EU weakens further, the USDi will move up rapidly resulting in an equally sharp drop in equities and commodity prices. If the reason for this rise is fear, gold will rise with the USDi.

UC 1hour chart
- more weakness in the UC (a stronger CHF)


1.04 is now resistance; support is at 1.0225 or lower at 1.012

GBPUSD
The GU range traded all last week, with weak a bearish trend. It broke sideways from the uptrend channel - and might now be in a similar ABC down correction with the EU.

A breakdown might be confirmed early in the week, with the trend sideways. It sits on the bottom edge of the channel presently.

GU 1hour chart - a collision of 2 channels resulting in failing up trend


Targets -
If correct with a recent 5 waves up, leg 4 finished at 1.511, which would be a 50% Fib retracement support for the GU. GU failed to get above 1.573 after a small rally to 1.569 - just short of the 1.57 target last week.

Now clearly bearish - lower Fib retracements on the GU chart are the 61.8% Fib (1.532), which won't be breached easily, so am expecting a bounce from this level. Below this is the 50% Fib at 1.511 which shoud hold based on an ABC correction in the GU, if this is correct.

USDJPY
UJ 1hour chart - remains within a trading band. The UJ is a combination of strong downward channel and falling wedge. Each time resulting in a lower swing bottom. Is it bottoming this time? Still .... what does it mean? The Yen is getting stronger still - this is not helping Japan's current economic problems and is likely to weaken in the short term.





The UJ neckline setup at 86.37 with a support below at 85.56 failed and the UJ is range trading sideways with no decisive up or down direction at all (consolidation). 86.37 remains as an upper bound, with 85 below it. This could be Japan electing to weaken the Yen - if demand remains for the Yen (strengthening it), it confirms to me its role as a primary trading currency in high demand.

I still see the UJ chart trend as unlikely to be strength in the USD - as the daily shows that 84.0 is likely (as weakness in the USD). The UJ pair has around 10% input into the value of the USDindex. This trend is less important for the purpose of the USD direction.


A SUMMARY -
There remains plausible explanations for the ongoing weakness in the EU and GU based on impacts on trade from the commitment to cut back spending (austerity). Is strength returning to the USD? Still no real strength to speak of in the USD. It's now a bit more than simply profit taking (in the EU and GU) and economic fear might be building - but for stagflation/deflation reasons.

It is like there is no alternative activity and everything above is showing signs of disinterest - waiting for decisive news to break. Monday I think will be quiet all round until the news on the EUR trade figures. UC and UJ are not doing anything remarkable to show underlying strength in the USD. Gold prices have sustained on the rising USD which is an indication to me more of fear in the markets.

Movement down in the EU and GU is not accompanied by any real move in the UC and UJ. Hence the EU and GU so far are the only cause for the rise in the USDi. This theme should continue next week with the moves indicated above (if I am reading it correctly).

Fear might be taking hold however stagflation/deflation remains the only reality unless a new QE2 is tabled. At best its a transitional currently market it the moment with no clear direction to speak of. The news for the EU and GU pairs is still more reasonable than that for the US.

I am suggesting at this point in time that this rally in the USD will continue up on weakening EU and GU - breaking above 83.5 - meaning equities would likely dip. The main danger remains as continued weakening of the EU and GU at this point in time.

Time will tell how decisive these moves are. Maybe 80cents is the floor on the USDi for a while until signs of growth appear from somewhere. This results in more choppy side trading to come.

rgds,
pw


APPENDIX - EWave assumptions on corrective (ABC) waves are as follows.-

Wave A (Has five sub waves 1, 2, 3, 4, 5)
Wave B (Has three sub waves namely wave A, B and C)
Wave C (Has five sub waves 1, 2, 3, 4, 5)

Corrective cycle may see all levels which are seen already up to wave 4 previously
Correction ends just above the level of wave 4. (but not always?)
Correction occurs in three waves, A, B and C - C wave's length is the same as A wave at least or 1.618 times A wave.

Hindenburg Omen confirmations

Wiki on the Hindenburg Omen

"The Hindenburg Omen is a combination of technical factors that attempt to measure the health of the NYSE, and by extension, the stock market as a whole. The goal of the indicator is to signal increased probability of a stock market crash.

The rationale is that under "normal conditions" either a substantial number of stocks may set new annual highs or annual lows, but not both at the same time. As a healthy market possesses a degree of uniformity, whether up or down, the simultaneous presence of many new highs and lows may signal trouble."

Here's a few charts you will find interesting ... using the H/L ratios of NYSE and NASDAQ. The period of Jul/Aug 2004 is a comparison at the moment.

Many markets are very choppy and sideways currently (20Aug2010) - so watch for any failure of the lower horizontal support. Lower looks highly likely from current levels.

H/L ratio is the EMA34 blue and EMA190 red (the actual signal is way to0 choppy and noisy). SPX (red) and NDX COMP (blue) in the background of each chart - 12 year history provided below to show how this compares with recent recoveries.

NYSE using NYHLR - note the 2 lines of support shown,
upper = 3.12, lower = 1.32 => lower is more important


The recent NYSE NYHLR signal you can get here (note the ratio can go to zero)

Nasdaq seems to have a reliable history of trending H/L ratio -
Upper = 1.0, Lower = 0.625 => lower line is more important


Nasdaq H/L approaching the first point of concern. Whether it fails the lower line or not is going to be interesting. We'll se it in the a double bottom of SPX at 1010 if it holds - assuming SPX breaks below 1070 this week. Up above it is always a positive.

The recent NASDAQ H/L Ratio signal you can get here (note the ratio can go to zero)

It's hard to argue with 2 large equity markets that pull the strings in AUS. One day we might grow up ....

It supports the little known fact that markets top out on neutral underlying stock performance - that is stocks top before the market tops.

Then of course, it also means the market does not top 'until' the stocks have topped. Food for thought in choppy sideways markets - but be cautious nonetheless. Perhaps hold but don't sink more into it until it shows clear improvement.

The clincher of course is that stocks are already underperforming by the time the indexes show it. Hence trust your instincts more than you trust the news. If you think enough stocks have support, you might elect to stay in.

rgds,
pw

PS. An idea borrowed from the boys at BreakPoint Trades (they use the NYSI cumulative) - who are worthwhile following


The recent NYSE NYSI Ratio signal you can get here

Fibonacci levels explained

While many would undoubtedly be aware of the Fibonacci sequence, and the technical use of Fibonacci (Fib) levels, here is a complete picture of how they are derived.

(no tricks were used in the making of this post, it uses numbers and basic calculations only)

FIBONACCI SEQUENCE and calculating Fib levels


Virtually everyone uses the 61.8, 50.0 and 38.2 Fib levels many times a day. Lessor known (but equally valid) Fib levels are 33.3, 20.0 etc from above

50% Fib - when applied to a range, is simply an average of that range (a mean price).

A lessor known rule for calculating Fibs (for when you cannot remember) is simply multiply 61.8% by itself (0.618x0.618)x100% = 38.2, and again = 23.6% etc

Now this is where it might get interesting -
More accurately, the primary FIB level of 61.8% is actually 0.618033989 (can see where I got this above at (**)). Add 1 to the primary Fib and you have the Golden Ratio (GR).

Major Fib level = 1/GR = GR - 1

So in order of decreasing Fib levels the actual sequence is -

(retraction levels, applied to a 100% range)
61.80%
50.00% = 1/2 (half) = an average price
38.20%
33.33% = 1/3 (third)
23.61%
20.00% = 1/5 (fifth)
14.59%
etc

Fib projections (beyond a range) simply add 100% to these numbers)
161.8%
150.0%
138.2% etc

Calculating Fib levels from the Fib sequence is simple enough. First create a sequence of divisions of consecutive pairs. Then skip one, and divide every second one. Then skip 2 and divide every third one etc etc.

You will then find each successive Fib level to be itself x 0.618 (rounding off). But linked to the Golden ratio.

Spooky hey? (:o)
Enjoy.

rgds,
pw

Wolfram Mathworld on the Golden Ratio
Wiki on the Golden Ratio

"The golden ratio, also known as the divine proportion, golden mean, or golden section, is a number often encountered when taking the ratios of distances in simple geometric figures such as the pentagon, pentagram, decagon and dodecahedron. "

USDindex major pairs - 15Aug2010

USDindex major pairs - EU, UC, GU, UJ
(all charts are clickable)

In consideration of possible impacts from austerity on the EU and GU with possible weaknesses forming in these 2, the UC and UJ pairs need to likewise show weakness in CHF and JPY for the USDi to be considerably stronger than were it is. Looking into each of these 4 major pairs provides more consideration for what the USDi might do based on what these each needs to do.

EURUSD
Possible impacts from spending/credit cutbacks might explain some recent weakness in the EU and GU pairs. Otherwise the data looks positive im comparison to anything else on the market.

Until some consolidation is seen from this sharp drop, the current EU trend is down. Good for USDi and bad for equities. Daily, the EU had a 250pip drop in 24hrs, which is large by any stretch, so a quick snap back up might be in order. If the EU continues to fail, then it is contrary to popular opinion and must be respected.

EU is starting to bunch up, and a believer might go long from tomorrows low if around 1.273 on divergences alone even if it gaps down. Sharp changes can have sharp reversals - above 1.285 would be reason to go long EU with at least a 1.30 target. (means USDi is topping also)

Is this leg 4 down of 5 waves up? After exceeding a target of 1.33 being the underside of a consolidation channel (either side of 50%Fib of the recent fall from the Dec2009 high). A double bottom may have formed at 1.274 with minor divergences forming on the 1hour. Is this forming a H&S at 1.274 now and will this continue a bull run to above 1.33?

EU hourly


I wouldn't fall in love with any rally in the EU from current levels, but a spec long might be in order if 1.275 holds and 1.28 is broken at close of tomorrow.

Targets -
If bullish , the 61.8%FIB retracement is 1.278 if this double bottom holds. It is a risk to go long from the current level on a double bottom only with little divergence - but I am at a loss to explain any better why the USDi is rallying. Otherwise the 50%Fib retrac is down at 1.260, or the 23.6% Fib retrac of the overall larger fall from Dec2009 is 1.265. No other levels have held so far.

This could possibly be the end of a wave 4 down to wave 5 top around 1.36 (or 50%Fib retrac of 1.35) if the EU turns bullish from here. (Bad for the USDi and good for equities). The gaps tomorrow should be interesting.

If bearish, then the top is in and the same levels above apply for a bear rally in the EU in an optimistic case for a small rally, and the double bottom presently might fail. Would be looking for a low as low as 1.245 before a small bear rally. Possibly a major EUR dysfunction in spite of the +ve spin if this is the case and a double dip might be on the way.

USDCHF
The UC remains intriguing, as it is still trapped in a trading range. 1.05 remains the magic number of the band it is trading in. The slightly bullish pennant forming for some direction - however neckline at 1.055 is raising the level for a bullish breakout. Long above 1.055 with a 1.065 target, short below 1.047 with a 1.037 target.

The UC is setting up the pattern for underwriting the direction of the USDi in my opinion. If the USD becomes a flight to safety, the UC should go up from this area in all likelihood. It's bunching is a reflection of indecision - weakly bullish of late. Has broken out of the recent downtrend and is trading sideways.

UC 1hour chart (updated from previous) - yet another decision time


1.05 is presently holding up.

GBPUSD
The GU is classic edge of your seat stuff. It remains crawling up the inside of the rising from the May2010 low, and has just hung onto a lessor known support level of 1.557 while so far avoiding the 50% retracement level of 1.555. Showing good divergences on the 1hour, can it return up from here?

Until a breakdown is confirmed, it remains in an upward channel after a relatively mild retrace. It sits on the edge of both channels presently - will it hold and return to +ve territory?

GU 1hour chart - a collision of 2 channels at recent support


While GU has held just above the 50% retracement level of 1.555 so far (from the drop from Nov2009 high) it's hard to see it not a least testing this level or a previous neckline of 1.544 (a stronger support). Like the EU, I won't fall in love with any GU rally from this level, but a long might be a low risk using the rising channel to provide stop limits and the 1.555 as support.

Targets -
If bullish, could this be a wave 4 down? Needs t0 get back above 1.573 from here to stand a chance of this. A bullish target would be 1.62 if this GU pullback is ending. If bearish, the 61.8%Fib is at 1.532 - however GU is currently testing a recent support at 1.555 which needs to fail first. Below this is a nice solid neckline at 1.530 which looks stronger still. Hard to see GU getting belted far below this for now on present news. The drop in the GU has not been as sharp as the EU, and a small rally to 1.57 might take place from here if the channel holds.

If bearish - Maybe the austerity concerns get revisited due to adverse employment and output data as a result of cutbacks. This argument holds for the EU also. Look for lower Fib retracements on the GU chart, however I would expect the thick dotted support lines to offer some strong support. I wouldn't expect the 61.8% Fib to be breached easily.

USDJPY
UJ 1hour chart - entering another trading band, but UJ is a combination of strong downward channel and falling wedge. Each time resulting in a lower swing bottom. Is it bottoming this time? If it is, what does it mean?

UJ has another clear neckline formed at 86.37 with a support below this at 85.56. While the UJ is not overbought, it requires more consolidation and/or a defined upwards move. This could be Japan electing to weaken the Yen as a strong yen at these levels will be hurting the terms of trade for Japan on reduced demand, without an alternative consumer market.

While Japan is actively seeking alternative markets for it's output, is alternative consumption available in volumes sufficient to support the maintaining of a strong Yen? Again, the UJ chart is unlikely to be strength in the USD, but it all adds up. The UJ pair has around 10% input into the value of the USDindex. So this trend is less important for the purpose of the USD direction.

The downtrend channels of the UJ shown needs to be broken decisively for the fear factor to appear in this pair. Otherwise the UJ chart could show Japan allowing it's currency depreciate while sorting out better terms of trade in a weak US economy, or it could more demand for Yen in carry trade.

A SUMMARY?
On the whole, there are plausible explanations for the recent weakness in the EU and GU based on impacts on trade from the commitment to cut back spending. Is this strength in the USD? Not at all, it could simply be profit taking. Fear of the economy should be showing up in the UC, and also the UJ. These 2 appear weak in comparison to the decisive movements in the EU and GU. A casual eye over the forming of bottoms, and any decisive and continued breakout from the consolidation of the UC (primarily) and UJ (secondary) might be more indicative of growing fear factor.

Rising UJ shows more demand for USD in preference to the Yen, however I don't think Japan would prevent the appreciation of the USD against the Yen in order to assist Japans terms of trade with the US.

Sustained gold prices would be more of an indication of fear in spite of a growing USD. If the USD does rise in UC and UJ without fear because of depreciation in the Yen and CHF, then the rising USD would cause the price of gold (and commodities) to fall doubly because of a lack of fear, and with the rising USD.

Any rallying in the EU would likely counteract this if the EU regains it's bullish rally. Hence the USD can appreciate against the CHF and Yen which would be adequately covered by a return to gains in the EU and GU. This would result in an equities rally with nil change to the USD. There is nothing whatever binding the UC and UJ to be opposite to EU and GU.

Clearly, I think if fear is to take hold, EU (primarily) and GU (secondary) will continue down on economic doubts, then you might find gold will hold it's own against a rising USD in this instance due to the fear factor. If deflation somehow becomes a reality (extremely slim chance), then I would expect all assets to depreciate (incl gold), with the USD becoming a safehaven of last resort.

I am suggesting at this point in time that this rally in the USD will prove to be short lived - at worst neutral to sideways for the next 2 weeks only if 81.6 holds, while remaining below 83.5 - meaning equities would return to +ve territory also. The main danger really appears to be any continued weakening of the EU and GU at this point in time.

Therefore is it possible to go long all 4 of these or short all these? Yes, they each appear independent (and should be handled/traded as such) in determining an overall direction for the USDi. The largest impacts are noticed in movements of the UC and EU.After all is said above, maybe the world is heading to hell in a hand basket. Time will tell.

rgds,
pw