Thursday, January 21, 2010


First off let me start by noting that almost all bear markets tend to unfold in at least three phases.

In 2001 the secular bear market began for the US dollar. Cyclically we tend to see a major bottom on the dollar about every 3 to 3 1/2 years. These major cycle lows are powerful enough that they can and do change the cyclical trend of the dollar. That means they rally powerful enough that they reverse the 200 day moving average.

Ultimately these are still just large counter trend rallies in an ongoing secular bear market so they eventually succumb to the secular trend and roll over again.

We saw the first phase of the bear come to an end with the 3 year cycle low in early 05. The next cyclical trend change came with the next 3 year cycle low in 08. This was accompanied by a severe deflationary threat as the credit bubble popped. But ultimately that still didn't change the fact that the dollar is in a secular bear market and this rally too eventually succumbed to the secular trend.

Interspersed between these major cycle lows we get a yearly cycle low that bottoms about every 9 months. These rallies are much weaker than a three year cycle low and just serve to relieve some of the bearish sentiment by regressing to the mean. None of these lows however are powerful enough to reverse the secular trend. By that I mean turn the 200 DMA.

The next major 3 year cycle low isn't due until 2011. The secular trend has again resumed as the 200 has now turned sharply lower. The odds are against this minor yearly cycle low being able to turn the secular trend.

In my opinion the dollar is now in the middle stages of the third leg down in this secular bear market that will bottom sometime in 2011.

At that point the secular trend for the dollar may or may not reverse depending on the actions of the Fed.