U.S. Dollar Could Rally In Coming Weeks

When one side of any market gets crowded, it is time to prepare for a possible reversal. While there are numerous reasons to be bearish on the U.S. dollar long-term, there are some short-to-intermediate-term factors that may cause the dollar to stage a counter-trend rally in the coming weeks. As we monitor the dollar, we must also consider the possible impact on “weak dollar assets” such as gold (GLD), silver (SLV), copper (JJC), oil (USO), agricultural commodities (DBA), Australian dollar (FXA), Canadian dollar (FXC), and emerging markets (EEM).

Investor sentiment, which can be used as a contrary indicator at extremes, is telling us to keep an open mind about the dollar as the next Fed meeting draws closer. According to Bloomberg:

Commodity Futures Trading Commission data show hedge funds and other large speculators are more bearish on the dollar than at any time in history, with bets on a decline exceeding those on a rise by 341,683 contracts as of Oct. 5. The last two times sentiment was close to this level, in early 2008 and late 2009, the dollar rallied. The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, surged as much as 24 percent in the second half of 2008 and 19.6 percent between November 2009 and June 2010. (Full Story).

The Fed’s strong hints at quantitative easing have helped propel the dollar lower in recent weeks. The details on any new quantitative easing programs will be announced on November 3, 2010. We need to prepare for a possible “sell the rumor, buy the news” scenario, especially if the Fed’s announcement fails to meet the market’s high expectations relative to dollar amount of bonds to be purchased by the Fed.

On a monthly chart going back to 1999, 75.10 and 72.62 represent logical areas to monitor closely relative to a possible reversal. Other levels to watch include 75.89, 74.27, 73.20, 72.46, and 70.70. Additional charts showing trends and levels to watch in the U.S. Dollar Index can be found in Weak Dollar Good for Stocks.

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). CCM would like to thank StockCharts.com for helping Short Takes create great looking charts.Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Short Takes is proudly powered by WordPress . Entries (RSS)