The Charts Say; Go Long The Dollar Now

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The Charts Say; Go Long The Dollar Now

The U.S. Dollar Index Is Back To Support

The U.S. Dollar Index (DXY) has been effecting a textbook double-bottom reversal over the past month. This bottom was driven by 1) a misplaced expectation for aggressive FOMC rate cuts 2) A shifting Fed policy-stance and 3) positive U.S. economic data. This combination of factors cause the DXY to fall to its October low, bounce from a major support level (the top of a now-broken long-term trading range), confirm support and move higher.

What the charts say now is it’s time to go long the dollar. Why it’s time to go long the dollar is that the DXY has fallen from it’s recent high and come back to support. This new support is not only a higher support level than the previous it is consistent with the baseline of the aforementioned double-bottom pattern. Assuming the DXY doesn’t fall below the support line (I don’t think it will) this is a textbook set up for long positions. We are in fact witnessing the potentially confirmatory retest of resistance-turned-to-support that completes the double-bottom.

The EUR/USD Is A Short

The EUR/USD is a short. The chart is a near-mirror image of the DXY chart and no wonder, the EU is the most heavily represented currency in the “basket of global currencies” that is the DXY. The EUR/USD is effecting a double-top reversal driven by dovish ECB policy and outlook and less-dovish/slightly hawkish FOMC policy stance. The difference between the two is this; incoming ECB President Christine Laggard is likely to continue and expand the easy money policy begun by outgoing chief Mario Draghi and Jerome Powell keeps saying the U.S. economy is on solid footing and no more policy changes are to be expected. The caveat for traders is that the EUR/USD is still inside a trading range, the decline signaled by price action may not be very great. At best, bearish traders might expect a move to 1.0925 or roughly 135 pips from today’s high.

Yen Softens On Increase In Risk-On Appetite

The Yen softens on an increase in risk on appetitive driven by trade hopes and Jerome Powell’s support of the economy. The USD/JPY is in an uptrend and set to continue moving higher. Today’s action confirms the short-term moving average and points to another test of resistance at the 109 level. A move above 109 has been rejected once but not decisively, not enough to break the trend, so a second attempt is sure to come. A close above 109 would be bullish but gains may be capped at 109.50, a move above there opens the door to a protracted rally and one that may reach 112.00 in the coming months.

Charts Say: Go Long the Russell 2000 in February as Small-Caps Set to Shine

Feb 1, 2020 6:03 AM EST

In late December, everyone in and out of Wall Street promotes their investment picks for the new year. You can spend about $25 on your local newsstand and get all these forecasts. A month later, and many of the pundits are silent about their ideas and what to do next or now. So with almost one-twelfth of the year over and a lot more ahead, I want to wade in with my best idea — go long the Russell 2000. My optimistic target is for a rise of 20% to 25% by May or early June.

The Russell 2000, begun in 1984, is formed by listing all companies in descending order by capitalization. In the U.S., the top 3,000 stocks (the 3,000 largest companies) make up the broad-market Russell 3000. The top 1,000 of those companies make up the large-cap Russell 1000, and the bottom 2,000 (the smallest companies) make up the small-cap Russell 2000 Index.

As a technical analyst or chartist I focus on the price movement, volume, and supporting indicators to reach my investment conclusions. I understand the fundamentals of stock valuation but I prefer the technical approach. Let’s take a look at some simple charts and indicators.

What The Charts Say About Major Markets Now

As I have noted in past columns, I have been charting stocks fo r more than three decades, and my personal belief is that analysis of chart patterns is an essential part of sizing up the tradeoff between reward and risk for investors at any point in the market cycle. This does not mean that so-called technical analysis should be used in isolation, and charting is not simply about forecasting winners and losers over the coming weeks, months or even years. But, since investing is really an ongoing series of decisions among many alternative paths one can take (buying/selling/holding/increasing position size/decreasing position size), it makes sense to be “eyes wide open” with what the market is telling us about supply and demand pressures regarding different market segments.

I thought about how to condense the volume of ongoing technical work I do into a format that is clear and bottom-line-oriented, given that this is an article and not a book. DO NOT treat these as recommendations to go out and buy or sell any security. Rather, consider this a snapshot of broad market conditions in an ongoing monitoring process.

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I looked at the major U.S. market sectors, as well as non-U.S. markets, bonds and the U.S. Dollar. This is yet a snippet of the overall market and the many stocks and securities within it. I took what I would call an intermediate-term outlook (using charts of weekly prices) from Barcharts.com. I grouped the 15 market segments into four tiers, which you can think of as answering the question, “What does the tradeoff between reward potential and risk look like for the next few months.”

Here is what I found:

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Source: Sungarden 2020

Source: Sungarden 2020

This analysis indicates to me that the stock market is not in unison. Some sectors look notably stronger than others, particularly industrials and financials. The next tier in terms of the reward/risk tradeoff is a combination of commodity-oriented sectors (Energy and Basic Materials) as well as Consumer Discretionary, which is about the stuff we want to buy as opposed to the stuff we need (Consumer Staples), which lands in the weakest group). Technology and healthcare are in the “Fair” group, and since these are large components of the Growth slice of the market, it would seem to me that Value stocks look relatively better here. The non-U.S. markets are also in the Fair group. With the U.S. Dollar placing in the “Excellent” group, that makes sense, since a stronger Dollar should act as a tailwind against stocks that trade in foreign currencies. Any gains earned in those currencies will be worth less when translated back to U.S. Dollars.

The bond market looks weak, as do utilities, which tend to key off the bond market more than other sectors, given their relatively high dividend yields. Consumer Staples, like utilities, have traditionally been considered a defensive sector, is part of that last group, which rounds out a picture that says “stocks higher, bond prices lower, and risk-seeking behavior has a reasonable chance of being rewarded over the intermediate term.

That is a mouthful, and as I said, this is the type of analysis best viewed not as a snapshot, but as part an ongoing process. This is part and parcel of the active investment management process, after all!

Finally, and most importantly, as pilots say on commercial airline flights, even when they turn off the fasten seat belt sign, keep your seat belt on when in your seat, “like we do here in the cockpit.” Central to my investment discipline is that regardless of how promising things may look over some periods of weeks or months, when we are this long into a historically-long bull market, avoiding major losses from market “events” should still be a primary pursuit.

Based on feedback I receive from this article, I can make this or similar analyses a regular part of my ongoing market insight for you.

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