Saturday, November 20, 2010

Dollar Is Key

The Dollar broke out above its intermediate term downtrend line on 11/16 and is now consolidating its gains since bottoming on 11/4. The impulsive move since 11/4 exceeded the previous swing high, and coupled with the trendline breakout, there is little reason to believe that the Dollar rally will not continue.

For the time being the inverse correlation between the Dollar and stocks and commodities remains in force. Thus, we should expect that a resumption in the Dollar uptrend will result in additional downside for stocks and commodities. If the next move up in the Dollar is a 3rd of a 3rd wave as some have proposed, then the coming decline could be severe. This fits with the expectation that we are now in wave (C) of a large flat correction in stocks.

Of course, if the trendline breakout in the Dollar was just a fake-out, then this interpretation is not valid.

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