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Sunday 4 April 2010

USD Retracement Will Push Equities Up

My last post was on how the USD uptrend still looked intact despite the sharp pullback into Wednesday's close. That remaining the case though was dependent on USD reversing back upwards on Thursday which most definitely failed to happen. The USD rising channel is not yet broken, but there is now every reason to think that this USD wave up since December peaked at 82.24:

GBPUSD has broken up decisively on Thursday and EURUSD now looks poised to do the same. They may yet turn back down, but that looks less likely than a further move up.

In the context of the longer term, we are likely to have been watching only the first wave (of 5 waves) of the third wave up since USD bottomed at 70.7 in 2008. We should now see a significant retracement of the wave up since December before the 3 of 3 starts and a much larger and longer move up in USD begins. I have marked likely retracement targets on the daily USD chart above. Here also is a look at the monthly USD chart for the long term USD picture with what I think is the most likely wave count:

If this USD wave up has finished, this is likely to have a very dramatic effect on equities as well. I've said before that an ongoing strong subwave up in USD was likely to at least cap equities into trading sideways even if there was no corresponding equities retracement, and equities have indeed been trading sideways for a couple of weeks now.

I was expecting that this would continue for another couple of weeks while the balance of the USD wave up played out, and that we would then see a powerful last wave up in equities while USD retraced. It now looks likely that this is happening now rather than later, and if we are now starting a period of USD retracement and consolidation that is likely to last a few weeks, then during that time we should expect to see equities surge ahead. On the SPX 60min chart you can see that the main channel up since the low on Feb 5th is very much intact, and that we are likely now to be starting the fifth and final subwave up within that channel. I've marked the likely wave count on the chart and the fourth wave seems to have formed an ascending triangle with a target in the 1200 area:

In the longer term the main rising channel since the bottom in March 2009 is also very much intact. I have also marked the likely support and resistance levels on the daily chart:

On quite a few charts we are seeing major reversals and breakouts here. FXI has broken up decisively from a broadening descending wedge, gold and oil seem to be breaking upwards too. I'm also seeing this on a lot of individual stock and ETF charts that I have been looking at over the last couple of days.

How far could equities rise? Difficult to say of course. I've liked the 61.8% fib retracement at 1229 for a while now and think SPX is likely to get there, though it may go further. I have a target of 18 on XLF from a broken and resolving rectangle:

The nightmare chart for bears is the Vix chart of course. On the weekly chart there is a year-old gently declining channel where the next target is somewhere between 13 and 14 depending on the time taken to get there. Could it really get that low? I wonder, but the level of misplaced complacency reached over the last year is already astounding:

We are not so much climbing a wall of worry in this market as surfing an ever expanding wave of complacency that government intervention can and will cure all economic ills.

When the government's credit starts getting tight, and that is likely to happen within a year of two at most and perhaps much sooner, then we'll see how much of this subsidised optimism can survive in an unsupported market.

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