US Dollar Bottoming
Lost amid the stock market crash (and this really is a crash – more on that later), is the possibility that a major reversal is underway in the US Dollar. Walking through Penn Station in New York on Friday, I saw the new issue of Timeand was immediately intrigued by its potential to indicate a bearish sentiment extreme and therefore a major USD low (see image below). Economist magazine has been known to dedicate its covers to the demise of the USD at lows. When Time does it, the significance is increased. For a pop culture magazine to feature a battered George Washington (thus implying USD weakness) on its cover, EVERYONE must know about it. An explanation of why magazine covers that feature financial trends often indicate turns can be found in my book, Sentiment in the Forex Market(Wiley Trading, 2008).
“Magazine covers are one of the best indicators of mass psychology and, by extension, one of the best signals that a market is close to forming a significant top or bottom. Markets, like life in general, are not linear. Markets change direction—bullish (optimism) for a top and bearish (pessimism) for a bottom—and extreme sentiment is required to effect that change. A major magazine would not devote its cover story to a financial market unless the story in question was considered newsworthy. A story (especially one about the value of a currency) is not considered newsworthy to a major magazine unless the public is obsessed with the story, and an obsessed public defines extreme sentiment. Since sentiment extremes accompany market turns, by association, major magazine covers are contrarian indicators and signal market turns.
Like the public, the media is always wrong about the direction of financial markets at the turn. Robert Prechter describes why in The Wave Principle of Human Social Behavior:
Reporters are usually nonprofessional in the fields that they cover, so the feelings of reporters in general mirror those of the public. Reporters often contact financial analysts who express their own feelings about markets, thus reflecting society’s consensus feelings. A bullish analyst rarely gets a forum at a major market bottom, and a bear rarely gets one at a major market top. The media’s choice of times to quote certain professionals typically shows those professionals retrospectively in their worst light.
In other words, the media has to be wrong at the turn, just like the public. The two basic emotions in financial speculation are fear and hope. When one of these emotions overwhelms the other, hope at a top and fear at a bottom, it is only a matter of time until the market turns the other way.”
US Dollar Index – Monthly
Time has featured a battered George Washington its cover twice – 1979 and now. The implications are bullish. It is worth noting that the USD traded sideways until January 1981 but by 1985 had doubled from its October 1978 low.
Dow Jones FXCM USDOLLAR Index (Ticker: USDOLLAR)
The rally from the August 1st low appears to be unfolding as an impulse (5 waves). A 5 wave rally from a low indicates that the larger trend has probably reversed higher. In this case, a pop above last week’s high may complete 5 waves up from the low and give way to a corrective decline back to the 9500 area before the next bull leg later this month.
E-Mini S&P 500 Continuous Contract
The stock market has crashed. On the NYSE, there were 3,070 stocks that finished down on the day compared with 48 that finished up. The decline/advance ratio of 63.96:1 is the most extreme in history (end of day). By comparison, the worst day of 2008 was September 29th when the ratio was 20.29:1. The end of day ratio on October 19, 1987 (Black Monday) was 37.97:1. ES volume was slightly higher today than it was on Friday and was the largest in history. It is not sensationalist to say that the current environment is unprecedented. End of day TICK was the most negative since November 12th, 1997 (Asian Financial Crisis). I know it is difficult if not impossible to believe right now, but there will be huge rallies and one may begin soon. The Dow hasn’t quite reached its August 2010 high of 10719.94 but the S&P Index (1129.24), SPY (113.18), and ES (1106.50) all have. The next levels in ES are 1078.25 and 1052.50. Daily RSI on the Dow is at 18.48, which is the lowest level since 7/23/2002. The market closed that day at 7702.34, found bottom the next day at 7532.66 and rallied to 9077.01 on 8/22/02 before retracing the entire rally. I am not advocating long risk but I am wary of being short risk at these levels.
Australian Dollar Reverses Sharply
Not surprisingly, the worst performer in recent days is the Australian Dollar which has declined over 8% since the last July high. The AUDUSD hasn’t even moved 8% in an entire month since May 2010 when its range was 14.28%. The range so far this month is 9.42%. Price closed below its 200 day average today for the first time since last August and the next major support is not until the March (and YTD) low of 9704. There is also the trendline from the 2008 or 2009 lows (depending on if you use the 2008 or 2009 lows) at 9585 or 9742 The 200 day average is now resistance at 10300 (daily pivot is 10272) and bears are in control as long as price is below Monday’s high of 10444. Trading above there would likely trigger a more substantial recovery back to Friday’s high of 10526 or even former support at 10678.
S&P Index and EURUSD
It ‘feels’ like the EURUSD is lagging the S&P. The S&P tested its 200 day average in June, the subsequent rally failed and we know what has happened since. The EURUSD tested its 200 day average in July, the subsequent rally failed and….we’ll see. If the July low of 13837 breaks, then focus would shift to the February low at 13428. 14250 remains short term resistance and price needs to stay below 14535 for the bearish bias to remain favored. Exceeding that level would shift focus to the May high at 14940 and a Fibonacci extension at 15246.
Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Monday), technical analysis of currency crosseson Wednesday and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forex Stream. A graduate of Bucknell University, he holds the Chartered Market Technician (CMT) designation from the Market Technician Association. He is the author of Sentiment in the Forex Market. Send requests to receive his reports via email to firstname.lastname@example.org.