By james Hyerczyk
Commodity Trading Advisor
Looking at the charts since May 1, one can see clearly that the rally in the U.S. Dollar Index had a huge influence on the break in the U.S. equity markets. With the Index chart showing further upside potential, U.S. equities may experience another wave of selling pressure over the near-term if time and price line up in similar fashion to previous major swings. The unknown at this time is the injection of further stimulus into the financial markets. If central banks decide to flood the markets with additional cash then the swing cycle will be cut short, but if they take a wait and see attitude then the following scenario is likely to take place over the next 30 days.
The recent sell-off in the equity and commodity markets has been closely linked to the sharp rise in the U.S. Dollar. From May 1, 2012 to June 1, 2012, the U.S. Dollar Index rose from 78.60 to 83.54 or 4.94 in 23 market days. Comparing the current rally to two previous rallies indicates that the Greenback still has some time left before it makes a reasonable correction. This could be an indication that equities and commodities are poised to take out recent lows despite solid up moves earlier in the week.
From July 27, 2011 to October 4, 2011, the Dollar Index rallied from 73.42 to 79.84, or 6.42 in 49 market days. Additionally, another rally took place from October 27, 2011 to January 12, 2012. This move was 74.72 to 81.78, or 7.06 in 56 market days.
Adding the size and duration of the first swing to the May 1, 2012 bottom at 78.60 projects a possible rally to 85.02 on July 9, 2012. Applying the same technique to the second swing projects a possible move to 85.66 on July 18, 2012. Based on this price and time analysis, the U.S. Dollar Index may be poised to move to 85.02 – 85.66 between July 9 and July 18.
Standing in the way of this projected rally is the 83.56 top from August 24, 2010. Last week the U.S. Dollar Index stopped at 83.54 and broke to 81.91 so we have to respect this price level at this time because it looks as if it is being defended by some size.
Based on the main range created by the June 2010 top at 88.71 and the May 2011 bottom at 72.70, a major retracement zone has been created at 80.71 to 82.59. Although the Index exceeded the upper boundary or Fibonacci retracement level, it wasn’t a clean breakout because the former top was in the way. The market may straddle this level over the near-term until enough buy orders build up to take it through the old top.
It is even possible that the Index will fall back to the 50% price level at 80.71. This price level will tie in nicely with a normal retracement of the rally from 78.60 to 83.54. This range creates a possible price target at 81.07 to 80.49 so there is a bit of an overlap with the major 50% price at 80.71.
Although a test of these downside targets can occur at any time, our swing chart analysis suggests that a meaningful correction is not likely until the U.S. Dollar Index completes this rally sometime between July 9 andJuly 16.
Weekly Nearby NASDAQ Futures Contract
Complicating our outlook for the U.S. Dollar Index is this week’s Nearby NASDAQ Futures trading action. Earlier in the week the market reached a low of 2427.75. The move to this level coupled with rumors of additionalstimulus triggered a sharp rally, setting up the index for a weekly closing price reversal bottom.
Although this chart pattern can create a major bottom, it typically leads to a counter-trend rally equal to at least 50% of the last major break. It also usually lasts 2 to 3 weeks. Based on the main range of 2785.50 to 2427.75, the first upside target is 2606.75, followed by 2649.00. If this move takes place then it may mean the U.S. Dollar Index is also retracing.
As mentioned earlier, the unknown is the action by the central banks. The chart patterns seem pretty clear, but a “surprise” move by either the Fed or the ECB could skew the patterns a little. Keep in mind that as long as the NASDAQ continues to make lower tops and lower bottoms, the main trend will remain down. Since there is no support base, I don’t expect this rally to last, in addition, technically the main trend will not turn up until 2747.00 is violated.
At the same time, support bases usually form inside major retracement zones. Since the main range on the Weekly Nearby NASDAQ futures chart is 1952.00 to 2785.50, a normal correction should take the market to 2368.75 to 2270.50. This is the value area and this is the area that is still likely to be tested.
Next week the trading action could become “push me, pull you” with counter-trend moves in the U.S. Dollar Index and NASDAQ futures market, but there is nothing on the charts to suggest that their main trends are getting ready to change.