Hedge your bets, U.S. dollar headed for a big drop
Hi scotty: This article might help to explain your chart. I hope it has not been posted before. Enjoy.
Sergio
September 6, 1998
The Toronto StarGetting Technical - By Bill Carrigan
thestar.com
Hedge your bets, U.S. dollar headed for a
big drop
Change in trend against greenback could
see healthy Toronto market and our dollar
Before we look at the U.S. dollar, I
thought I should check two important words
in my Webster's dictionary.
Safe (adj): freed from harm or risk;
Haven (n): harbour, port.
So there you have it, a safe haven is a
port, free from risk. If a safe haven
becomes too popular, it can get
overcrowded and expensive. The high price
for safety will then trigger a search for
a new safe haven.
For the past few years, the U.S. dollar
has been a safe haven for all that
investment capital sloshing around the
world.
Investors around the globe should be aware
of the major risk involved in foreign
investing. The currency of your country of
choice could go down the drain and take
with it any profits made in their local
stock market.
This learning curve accelerated last year
with the collapse of some Asian
currencies. As a result, cash from around
the globe poured into the U.S. stock and
bond markets. It was a win-win deal: a
rising bond and stock market backed by a
strong local currency, the U.S. dollar.
I am surprised at the number of investors
I speak to who do not know that the U.S.
dollar can be charted. When we chart
currencies, grains and metals, they are
priced in U.S. dollars. The U.S. dollar is
then a world benchmark by which all other
commodities are valued. The problem in
charting the dollar is to find another
benchmark to which to compare the dollar.
J.P. Morgan & Co Inc. of New York solved
the problem by creating a trade-weighted
currency index. The U.S. dollar index
measures the dollar's strength against a
currency basket consisting of Canada,
Japan, Germany, France, Italy, U.K.,
Australia, Belgium, Denmark, Finland,
Netherlands, Norway, Spain, Sweden,
Switzerland, Greece, Austria and Portugal.
The basket is weighted to reflect the
global pattern of bilateral trade in
manufactured goods in 1990 and based to
the average of 1990 = 100. This U.S.
dollar index can be found in the commodity
pages of most financial publications. For
more information look at
jpmorgan.com.
Our chart features the U.S. dollar index
based on weekly data. The U.S. dollar has
been climbing for several quarters,
gutting world commodity prices in the
process while enhancing the value of
financial assets such as U.S. equities and
bonds.
This is the main reason the New York stock
market has outperformed our
commodity-sensitive TSE for the past two
years.
I think all that is about to change.
When technical analysts look at a chart,
they use tools such as moving averages,
trend lines and pattern recognition. A
pattern in a chart can be important
because when a stock or index advances or
falls over time, the buying or selling
pressure will often create top, bottom and
continuation formations.
History has proven some of these
formations or patterns are quite good at
forecasting a future move in a stock or
index. Most modern charting software
packages allow you to back-test the hit
rate of various indicators and patterns.
The software will also allow you to
paper-trade in order to test any technical
approach.
There are many chart patterns to watch
for, but only two get my attention and
respect. They are the line formation and
the rising or falling wedge.
-------------------------
The U.S. dollar has been
climbing for several
quarters, gutting world
commodity prices
-------------------------
This week, I will deal with the huge
rising wedge that has formed in the chart
of the U.S. dollar.
Wedges are formed by prices fluctuating
between two converging boundary lines. For
a rising wedge, the boundary lines are
slanted upward with the lower boundary
line at a steeper angle than the upper
boundary line. The falling wedge is the
reverse scenario.
The rising wedge in the U.S. dollar is an
illustration of supply and demand. For
several months now the dollar has
attracted new waves of buying. The dollar
then makes a new high and touches the
upper boundary line. The higher prices
then attract selling and then the dollar
falls down to the lower boundary line, to
a higher low.
The problem is, the new highs are losing
steam as they crawl along the upper
boundary line.
In a healthy advance, both boundary lines
should be parallel. It is the drooping
upper boundary line in our chart that
creates the wedge.
Time runs out as the wedge narrows. In
most cases, the buyers are spent and the
next wave of selling sends the price
crashing out of the formation to the down
side. We can see this clearly in our
chart. On Aug. 28, the U.S. dollar broke
down out of the wedge.
This event was also obvious to the many
fans of the Elliot Wave Theory. They call
it a diagonal triangle-ending pattern.
According to the Elliot Wave, this is the
end of a fifth wave with wave one
beginning at mid-1995.
The trouble I have with Elliot is all the
wave counting. They always tell you where
you were but never where you are going. It
is much like that east coast expression,
''Stay where you're to, till I comes where
you're at.''
In any event, the reaction on the gold,
oil and metal stocks last Monday was
muted. The dollar then continued the slide
and by mid-week the gold, oil and metal
stocks took flight, some with double-digit
gains.
I think we have a trend change in the U.S.
dollar. If this is the case, the Toronto
market should out-perform the New York
market over the next year or two.
A stronger Canadian dollar would confirm
this possibility.
-------------------
Bill Carrigan is an independent stock
market analyst. His Getting Technical
appears Sunday. He can be reached by
E-Mail at carrigan@vaxxine.com
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