Other Currencies Are Sold, Not US Dollar Being Bought

Or so it seems to me. U.S. dollar has had a sharp reversal upward ever since Dubai announced the debt freeze very conveniently on Thanksgiving Day when the financial markets in the U.S. were closed.

Convenient in two ways: one, the U.S. dollar index (DXY) was just starting to bust the tenuous support around 75 to go down lower when Dubai announced its intention; it was also convenient for the commercial players in the U.S. dollar futures market, who had been net long U.S. dollar since this summer.

The sharp rise is attributed to the usual stuff: flight to safety and liquidity of U.S. dollar and dollar-denominated securities. I don't quite understand why the currency of a country whose government continues reckless spending is safe, but that's what's been said.

But is it the strength of the dollar, or the weakness of other currencies, particularly Euro and British Pound? And while the dollar has been ramping up with no fundamentals underneath it (as I can see), why aren't other U.S. dollar-denominated securities like Treasuries, agency bonds, MBS getting the bid?

When I created this chart below and took a look at it, I came to a conclusion (for now) that it is the weakness of other currencies. Why? Because it is only the U.S. dollar currency that has been bid up since Thanksgiving Day. Short-term Treasuries are flat, no bid for agency bonds and MBS, and long-term Treasuries are being sold and yields are rising. The lines represent different ETFs as proxy for underlying currencies and bonds.



UUP: US dollar ETF
FXE: Euro ETF
FXB: British Pound ETF
FXY: Japanese Yen ETF
SHY: 1-3 year Treasury ETF
TLT: 20+year Treasury ETF
MBB: MBS ETF
AGZ: Agency bond ETF

Limitation of Technical Analysis

Tickerville's Quint Tatro (whom I took a webinar on TA from, and whom I've been using as one of my contra-indicators since April this year - sorry Quint) continues to be bearish.

He starts this Tape Talk, talking about how Friday's 3.5 hour market had a significant volume distribution, without even mentioning Dubai.

Tape Talk (11/29/09)

I'm wondering if this should be the last time that I even link to his analysis... (If you are his fan, make sure you bookmark his site.)

Without macro (financial, economic, political, even social) understanding (or at least an attempt), the investment/trading becomes reactive to the events (like Dubai) as they unfold, and technical analysis becomes justification after the fact.

Now the guys at Breakpointtrades.com, from which I receive free TA newsletters sent out Early Friday alert after Dubai debt crisis caused the U.S. stock market futures into deep red like it were September 2008 all over again. The alert arrived in my Inbox at 3:01AM PST on Friday, with 43 charts no less, so that we would be prepared mentally for a potential big gap down. They are also technical traders, but they seem to put TA in bigger context.

Early Friday Morning Market Newsletter Special Edition (11/27/09 Breakpointtrades.com)

I trimmed my holdings somewhat on Friday, but more of a housekeeping and not a panic selling. It was a gap down alright, but the indices went nowhere near what I was prepared for (at least not yet, it could still happen), and a peek into the Breakpointtrades.com guys' charts helped calm the nerve. (Disclosure: I'm not paid to recommend their site or their service.)

Batten Down the Hatches, Probably...

Thank you Dubai for the Thanksgiving surprise!

This is one of those events that defy technical analysis. You can't predict the event like this by looking at the chart. Asian markets are having a second day of severe down draught, with Hang Seng and Seol Composit leading the way. European bourses are sure to follow, which will be followed by the U.S. market. Dow futures are down 250 points as of 00:16 AM EST. I don't remember seeing the Dow futures this much in deep negative territory even in September/October of 2008.

The chart below is a 2-year Dow weekly chart, just to show the Fibonacci retracement from the March bottom to November top to see how low the index could fall. 61.8% line seems to offer a solid support, which is around 8,960. Back to the level in July. In between, 10,000 and 9,500 have some support, as they were resistance on the way up.



One of many things I regret for not having paid attention is Dubai's world-tallest skyscraper. When that building (still under construction) became the tallest in the world, it was September 1st, 2008. Right before everything went to hell in the stock markets worldwide. I had read about the "skyscraper index" back in January 2008, but I didn't connect.

It would be ironic if another Dubai incident (this time a threat of sovereign default) marks the beginning of a significant leg down in the market, which Elliott Wave people call P3, last leg of a bear market which will undercut the first leg low.