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For All Dollar Chartists: An Outlook For 2010
Now that the market lives and breathes with every Fed decision and transaction, reading tea leaves and juggling cow feces has about the same predictive impact on security outcomes as analyzing fundamentals or technicals. Yet from the perspective of correlations, nothing is as important as the dollar: equities have a -100% correlation to the value of the dollar, which in turn impacts commodities and even interest rates. The dollar is the primary market leading indicator. Which is why we present the key points from the Goldman Sachs "Themes and Ideas for Q1 2010 and Beyond: FX Sales Strats" in which Goldman shares a few thoughts on why in its chartist opinion, and contrary to that voiced by Jim O'Neill and other Goldman strategists, the dollar is headed higher. And possibly much higher.
On why the upside in EUR is limited:
Various resistance levels have been reached- 76.4 retrace of 2008 fall at recent highs:
Another 76.4 retrace: AUDUSD whose October low was 0.6007, relative to retrace level of 0.5971.
The 55 DMA in the EURUSD has been breached. Next stop: 200 DMA at 1.4118
This compares to an inverse breakout in last 2008.
And if we get a 200 DMA correction, then what?
Some observations here:
- The '92-’95 comparison again gives us some useful input. Following the initial peak at 1.3837 in April ’95, where the market had recovered approximately 80% of the September ‘92-August ’93 sell off, it begins to form a topping structure, but it’s a drawn out multi-month process.
- Looking at the zoomed chart on the right and tracking the colour coding; following the rally to 1.3837, EURUSD sells off sharply breaking below the 55-dma for the first time in a number of months and nearly closes the gap to the 200-dma, it then recovers to make a marginal new high for the cycle around 3-months later, from there a broader down move starts and that level is not seen again for nearly 12-years.
Most notably, the dollar is massively overvalued when compared to the GS Dynamic Equilibrium Exchange Rate Model. According to this the EURUSD should be at $1.20
Commentary:
- EURUSD very seldom moves significantly above/below 2 standard deviations from fair value.
- The chart opposite shows EURUSD spot in blue, and GS Research’s GSDEER (Goldman Sachs Dynamic Equilibrium Exchange Rate Model) fair value estimate for EURUSD in Red. This is then overlaid with a two standard deviation range around the fair value estimate in green.
- As can be seen, EURUSD very seldom moves more than 2 standard deviations away from fair value, and has never sustained such a move for an extended period when it has happened. The market tending to subsequently reverse sharply back towards fair
value. - Again looking back to the ’92/’95 period with which we’ve made a number of comparisons, the market moved more than 2 standard deviations above fair value as it peaked in ‘95. It them consolidated at that extreme and eventually turned back toward fair value. This is another similarity between the price action from July ‘08 to now and from September ‘92 to April/August ‘95.
Goldman's chartists' summary view: an initial move close to the 200-dma, followed by a recovery toward the highs and then another larger down move
- The colour scheme used on the chart opposite is the same as that used for the historic comparison chart on slide 5.
- In brief it appears that the market may well be entering a drawn out, i.e. lengthy, topping process.
- Using the colour scheme opposite: Following the trend into the cycle highs the market completes a correction to the 200-dma which stands at 1.4118 – similar in inverse to the move from December ‘08. It then bounces from the 200-dma, similar to last December and also very similar to the price action seen at the ’95 highs – the comparison with ‘95 implying the risk of a double top (marginal new high beyond 1.5145). From here the market may well set a significant peak and prepare to decline on a trend basis.
- The charts on the following slide highlight why it seems reasonable to expect the topping process to be drawn out and also what we’re watching for signals of a more immediate turn taking place.
Is any of this relevant? Who knows - the Fed's intervention sure makes for pretty charts. The question is at what point will the Fed vigilantes take matters into their own hands. So far they have run from any head on confrontation, which is explainable seeing who is armed with a dollar printing press. So look to Europe, and things there are turning ugly quick. Should the dollar retrace to 1.36 on the EUR, the carry trade will collapse and look for a major retracement in stock market gains. The only question is how soon? Only Bernanke knows the answer.
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Obama just loves being on TV surrounded by his supporters. I wish someone would throw something at his face and shut him up for a while.
i sincerely hope you receive a visit from a couple of agents from the treasury department
Why? A huge lemon or banana cream pie right in the puss is just 'desserts' for any politician.
They're all just clowns, puppets and bitches of Goldman Sucks and the rest of the Wall Street Tribe.
When they begin to command respect for their decisions and results instead of kissing the dicks of their financial
charlatans,then maybe they'll get it.
But you go right ahead and respect the hell out of 'em.
Just don't forget to wipe your chin.
Off topic.. did 10yr tbill break out of its bullish flag pattern?
TD, FYI
http://www.treas.gov/tic/mfh.txt
from a fundamental purchasing power perspective, anyone who has spent time in Europe sees that the Euro is seriously overvalued vis a vis the Dollar. Such situations generally correct sharply in my experience.
-100% Correlation?
Have you been paying attention the last few weeks? Its not to say one doesn't lead the other, but look at a chart of $spx:$dxy and you will see theres more to equities rise than a mere dollar fall, and the correlation has been significantly weakened for some time now.
After all the fancy charts and analysis, Goldman guy comes to the conclusion "an initial move close to the 200 day moving average, followed by a recovery toward the highs and then another larger down move". This is like a standard answer from the Magic Eight Ball. His postgraduate degree from Harvard was so worth it (as well as his 6-7 figure salary).
Haha, nice call. I'll be sure to throw a tomato next time I'm downtown.
Give it a little while and then you can wrap it in some freshly printed million dollar bills to boot!
Am getting tired of those darn DOLLARBUGS who keep saying how great their investment in dollars are, when for the past 6+ generations the USD has lost over 95% of its purchasing power. Anyone who actually believes the Federal Reserve's FIAT currency is going up -- actually it is debt in the form of a Federal Reserve Note -- must be financially suicidal.
Gold IS money.
you will get your dollar collapse ...just not for a while ..the dollar is in a 335 b wave since 1992 ...it is in the final wave up now ...the collapse comes after this top at 120 (unless the wave 5 fails )
That looks like a clear inverse head and shoulders pattern with a retest of the upward sloping neckline... not once but twice (double bottom?) and break out to retest the high? Goldman gets short here may signal a transfer of freshly printed dollars from Goldman clients to the other GS (Soros).
USD or Euro, that is like being presented with the dining options on Fear Factor.
Seriously, the currencies are in trouble because of the social welfare programs promised by santa claus politicians promising to give away the prosperity of America to each citizen that votes for them and spending half of our budget on wars and bases we can't afford.
Right now, investing in these (no decision, sitting on cash is a decision) is like investing in physical newspaper printing companies that will never be profitable again and will continue issuing additional equity offerings that dilute each original share. To be given any hope in the future (so everyone doesn't immediately pile into gold and crash all other asset classes), policies must provide realistic hope. Talk is cheap, we need action.
a "chartist" or "chartician" is someone with a hobby.
a "technician" is someone who is a professional.
wiki it.
while only a slight semantic distinction, in reality, there could not be a wider gap between the two loose labels.
'technicians' trade and / or teach for a living.
'chartists' dabble in a hobby (like building model trains) once they get home from their 9 to 5.
would you, ever, allow a 3rd-year resident at a local hospital to perform brain surgery on you ?? of course not !!
any rational personal with a brain worth performing surgery upon would summarily demand that only a pre-eminent doctor with extensive experience from either cedars-sinai or columbia presbyterian perform surgery upon their brain.
tortured analogue aside ... is your portfolio really that different ??
all that said: this is an excellent piece highlighting basic TA.
one specific point of contention, which serves to underscore the difference between so-called chartists and actual technicians:
there is NO such thing as a "DMA."
there is an SMA, EMA, DEMA, TEMA, WMA, TMA, HMA, JMA, ZMA and innumerable AMA's, which are 'adaptive' moving average methodologies but there is NO such thing as a "DMA."
whenever someone says/ writes "DMA" they are simply underscoring the fact that they are, in fact, a 'chartist' and not a technician.
what 'they' mean by "DMA" is ... 50-day SMA, which is the "simple moving average."
AGAIN: we, as actual technicians who actually trade ... and I, as a rather petulant, arrogant child who lacks self-restraint during off-peak when talking shop ... have absolutely no patience whatsoever for wholly inaccurate representations of / within technical analysis from those who should know better ; and as for those who shouldn't, I only cease biting my lip to the point of scarring it when other know-it-all's present lazy / crappy anal-ysis as fact, when, in fact, their personal opinion(s) are anything but. arrogant know-it-all who is a technican, both by trade and designation(s), over n out.
"EURUSD very seldom moves significantly above/below 2 standard deviations from fair value"
does the EURO knows that???????