Watching the Dollar

This is Friday's dollar chart again, showing the 3-year daily view of the USDX. Today appears to be a continuation of Friday's action, but with downside movement in stocks, commodities, and gold.

Again we ask, "is this sustainable?"

Fundamentally, we do not believe it. Taking a step back and looking at the dollar, we see that we're right around the 61.2% Fibonacci retracement level. Failure will definitely force a complete retracement of the rally from the March 2008 rally.

Note some characteristics of the decline into the March 2008 lows. First, RSI never broke 70 until the breakout in July 2008. MACD went above 0.5 for the first time at that level as well. From that point forward, RSI peaked in September 2008 and has been falling ever since, even though the dollar itself didn't peak until March 2009.

Again, the fundamentals don't support the move. The credit crisis sparked the dollar rally. We would expect to see problems in corporate and junk bonds, issues in the TED spread, and other stress-related items if we were entering another phase of credit crisis impact. Thus far, there's nothing.

The only other scenario for the dollar is that the US has made significant and sustaining fundamental changes in the economy such that the economic "recovery" is real. That has not happened.

It's possible we're seeing the beginning of a new bubble, but more likely we're seeing some technical trading. If so, then we may see the dollar rise until the slow stochastic 70-75 level and then turn over. That would be in line with the trend, and would not take long to run its course.

Here are the key resistance levels we're watching:
- 79.61 -- 50 day moving average
- 80.16 -- 50% retracement
- 80.31-- Top range of the Bollinger Band

We believe that one of those levels will mark a turn point.

The red flags to watch that will blow this theory:
- RSI rises above 50 by much at all (such that it would break the down trend line)
- Slow stochastic rises above 70 or so before a turn occurs
- MACD rises above 0.5
- ANY scary signals in the TED spread, LIBOR, junk bonds, or any major bank failure risks

Assets will probably weaken until the dollar rolls over. It may represent an excellent buying opportunity for key assets that have fantastic fundamentals, like gold, oil, commodities in general, producer companies, and possibly select emerging markets.

Let's see how we close today. More tonight.