It’s still not over. I could be talking about the dollar correction, the dollar rally or even the great run in the stock market. In other words, these markets require a lot of patience. A funny thing happened on the way to the Forum this week (circa 1966). The natives are getting restless with the greenback. The pattern is as complex right now as I’ve ever seen an hourly chart. Word has it the reflation trade is back on. Word has it the dollar rally is fading.
Whose word? This is what you hear on television and I’ll take it as a slice of what the crowd is thinking. Let’s get one thing straight. Markets don’t have to tumble to change sentiment. At the Fibonacci Forecaster, we specialize in the time dimension of technical analysis. A market can correct in two ways. It can drop like a rock or it can make up for it and work off the bullish condition by wasting everyone’s time and go sideways. It will go sideways until enough participants get frustrated to the point they give up on the possibility it will ever go up. I’m somewhat amused by this frustration because the dollar hasn’t even retraced back 38% of the gains it picked up since November. Until it takes out 38% there is no technical damage to bear market rally. The dollar is doing a very good job of wasting everyone’s time. But it’s doing the job because it is working off an extremely bullish condition at the December high. You’ve seen the monthly chart posted recently, there’s plenty of room for more correction without violating the new trend. What I’ll be watching this week is to see how much frustration can be absorbed from here until it gets to 38% which is approximately 77.15. It now looks like that test will materialize to start the week.
Why exactly do we have such crazy pattern in the Greenback? I have a theory about it. First of all, the Greenback is in a bear market right? Then we have a bear market rally which goes against the grain. Now prices are correcting against a trend that is already going against the grain. Consequently, price action is incredibly choppy because it is correcting two degrees away from the larger degree trend.
One other thing, the dollar is also choppy because of a massive test of polarity on a monthly scale going on against the yen, but that’s another story.
That gets us to Friday where job losses were more than expected and much closer to 100K than the zero figure everyone was hoping for. What did they really expect? December isn’t the greatest hiring month even when times are good. The temporary number was good which indicates demand for goods and services may be picking up but it could also be the temp spike for Christmas workers. All of these statistics are missing the point. On New Year’s Eve the euphoria bandwagon got stoked with the concept the recovery was kicking into higher gear and it would be proven by the good jobs number a week out. I think the week was about buy the rumor and sell the news. They certainly bought the rumor and when the news was vanilla, so was the selling. But you are probably thinking you finally caught Fibonacciman agreeing the fundamentals or news event drove the action on Friday.
Not quite. I’m still a graduate of the Dick Arms school of technical analysis with my major coursework in everything you ever wanted to know about the fundamentals is reflected in the pattern. We are in a larger test of long term resistance on a USD/JPY chart (see below) and that action is influencing the dollar to a large part here. So if the dollar is going to be choppy, the market has a chance to be flat. For the week, the USD/JPY opened at 93.21 and closed at 92.65. These long term tests have a way of taking their time. What this chart shows is a new uptrend channel which we expected to be resistance and it was. We also anticipated after the new, smaller upper median line was hit that it would retest the big polarity line. That line also happens to be a median line on a longer term monthly chart.
The news or reaction wasn’t what anyone was expecting which is the easiest way of explaining the situation. But the bottom line is I don’t see a top yet. I don’t see a top in the banking sector, semiconductors or Russell 2000. Without those three, a top is very unlikely. That could change by the end of the week but from the information we have now, it is still the status quo.
Most impressive lately has been the Russell 2000. The Russell had been lagging as late as Thanksgiving but has been trending straight up throughout December. I think it’s late in the move but still should have a little more gas in the tank. The semiconductors are getting tired as they had back to back dojis last week. Even the biotech sector is hanging tough and now has a target of around 1000. But the story has been the banking sector. The low was tested on Dec. 17 which held. Since that time it has managed to work its way out of the corrective channel lines into a near term uptrend. It is presently sitting at resistance but will hit much larger resistance at 51 if it can break through 48. It has a reasonable shot at making it through the 47-48 handle. But I doubt it will be able to get through 51.
What does it all mean? As I’m writing this, the dollar is down again and will test the 38% line on Monday. Overall, all of the charts I’ve discussed here still have room on the upside. Not much room, but enough to go slightly higher. There’s another time window at the end of the week in the metals so that will be the point where we have the next inflection point. When you look at the dollar on Monday morning and if it’s down, will you get the feeling it is the same old greenback? That is exactly what I’m talking about.