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Yet another North Korean missile is fired eastwards – and this time, stocks headed south initially. But it is the reaction of the dollar I am intrigued by. The dollar has been in a steep decline for some time and I have been watching for signs it has made a major low (and have been early). But I believe once that is in, the dollar will rally hard and there should be big profits for the nimble trader.
What piqued my interest was the statement that the euro has just made a 32-month high against the dollar – on BBC Radio 4 news headlines, no less! So let’s put that in perspective. The euro has been rallying against the dollar continuously from the December 1.04 low in pretty steady fashion. In no time do I recall this being covered in the BBC news.
So now it has risen to the 1.20 level in nine months, the epitome of the MSM decides the achievement is worthy of note to feature this event in a major news broadcast.
On the principle that when the MSM features a market that has been in a strong trend for some time, that trend is over or nearly so, I want to make a case for a top.
So can I make a case that the rally is about over? Here is the weekly chart
There are several important features. First, the sharp decline in 2014 – 2-15 was met with a complex and lengthy base-building between 1.04 and 1.16, which the market has only recently broken up out of.
This lengthy base heralded a sharp rally out of it as the many shorts built up were forced to cover on the rally. That has produced this almost vertical rise. But today with the market having reached the 1.20 area, it has met the Fibonacci 38% resistance and also the chart point of the July 2012 major low. This is very strong resistance, particularly coming after a strong bull phase where hedge funds have built up a massive net long bullish position.
There is the potential that today’s high at 1.2070 (within pips of the precise 2012 low) is the extent of the rally. For more clues I like to zoom in on the daily:
From the March low I can count five waves along my tramlines with today’s high almost touching the upper tramline. That miss may be significant because if the market does drop from here, it will indicate internal weakness and herald further declines.
Also, if you check the momentum chart, if the market does turn down from here, a momentum divergence will appear – also a bearish sign.
With so much bullish euro sentiment and the market having made significant targets into resistance, odds are good that the dollar will advance from here or nearby. A lot of the rationale given for the euro strength is the belief that US interest rates will not move up any time soon. Naturally, this is taken on board as a perfectly sensible explanation for the euro’s strength.
I suggest that when the dollar does move back up, the MSM will be full of stories explaining that ‘experts’ now believe rates will in fact start moving up. No, these ‘explanations’ are merely post-market rationalizations that have no predictive value whatsoever. What use to a trader is there in any of these market comments? The move has happened already and no amount of clever talk can bring the market back to where you can place a good profitable trade!
Anyone familiar with how markets really work could write the news in advance – in fact, I have been able to manage that on occasion.
Gold rallies into one of my targets
With North Korea stirring things nuclear up, there has been a rush into gold and silver, the rally aided of course by the weakness in the dollar. Gold has rallied by $35 in just two days this week. But if the euro is about to move lower, can the metals be far behind?
Here is the daily
The big decline last year is a large A wave and the current rally is the B wave. When that tops, we shall have a C wave down which should be devastating in its collapse. But first, we are long and riding this B wave. We have excellent entries especially with a trade in July at the $1220 level. But I fear we have entered major resistance not only at the Fib 78% level but also the chart resistance of the major lows of last year (red arrows).
Ideally the current B wave should end above the $1380 highs and we are only $60 from that target. But with the market facing stiff resistance and barring a full-on nuclear confrontation, the odds are good for a pull-back of some sort which will ensue in parallel with the likely euro pull-back mentioned above.
The B wave rally off the December lows is mighty tricky to analyse in Elliott wave terms – I gave up a long time ago! So with hefty profits accumulated, I shall be looking to bank some of them in gold and silver.