Tuesday, October 13, 2009

76 is gone, where now?

I've been expecting the dollar to break through the major support level at 76. The reason being that we still have 1-3 weeks before the current daily cycle is due to bottom.

Now this daily cycle when it bottoms should also coincide with a major weekly cycle bottom. Generally speaking when we get a major weekly cycle bottom in anything, whether it be the dollar, stocks, bonds or gold it almost always generates an extreme amount of fear.

I doubt the coming weekly cycle bottom in the dollar is going to be any different. At the moment there are still too many people trying to pick the bottom. Most of them are basing their bottom calls on the momentum divergence in MACD.

As I've said many times in the past it's probably pretty tough to make any lasting money trading divergences. If a divergence lasts long enough it's no longer a divergence. How can one know ahead of time whether the divergence is going to extend till it disappears or not?

Take a look back at the dollar as it dropped out of the last 4 year cycle top in `06. There were multiple divergences for months and months. As it turned out none of them signalled anything other than short term bounces and the dollar continued to decline into the next four year cycle low in March of `08.

The upshot is that we can probably expect the dollar decline to get intense the next couple of weeks as it moves into a major low. I expect no one will be trying to pick a bottom at that time. Far from it, almost everyone will be expecting the dollar to collapse. That's the kind of sentiment we need to see to put in a more lasting bottom.

Granted I'm not talking about a true bottom, that's not due till at least 2012 and maybe much later if the Fed doesn't come to it's senses. No I just mean a significant bounce to relieve what should by that time be extremely stretched conditions both technically and sentiment wise.

This can either unfold as a strong explosive rally or an extended sideways period to allow the 200 DMA to catch up so-to-speak.

Anyway you can imagine the move in commodities in general and gold in particular if the dollar even just tests 74.

Who knows where gold could be if we see 72?