Telling Trend Reversals: The Dollar and Bonds
In last week’s Money and Markets column, I wrote about Bernanke’s quantitative easing policy. The goal of the policy is to create higher stock and housing prices by pushing the dollar and interest rates down.
So how is the Fed’s plan going? Let’s start with the …
Euro/Dollar
The day after the Fed announced it would buy another $600 billion in Treasury bonds with newly created money, the euro broke out of a short-term consolidation in what seemed to be a continuation of an uptrend that began in June.
But one day later this move proved to be a false breakout with the euro falling from 1.4282 to 1.3587 as of this past Monday. That is a huge move in only seven trading days! And now the euro’s high in the wake of the Fed’s announcement looks like the last hurrah of the rally off June’s low.
As you can see in the EUR/USD chart below, the euro made a double-top in 2008. Ever since, there have been lower highs and lower lows. The 200-day moving average is still declining thus confirming the euro’s longer term downtrend.
Euro/Dollar 2000 – 2010
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Source: www.decisionpoint.com
The lower panel of the chart shows the price momentum oscillator. Recently this indicator shot up above two. Readings as high as this have historically been followed by larger corrections or trend reversals.
And I can’t see any reason why it should be different this time. Especially since sentiment indicators towards the dollar have reached very high bearish readings.
Now let’s turn to the bond market …
Treasury Bonds Are Firing Back
My next chart shows 30-year Treasury bond yields. After the Fed’s decision to implement QE2, yields started to rise and prices started to sink. Not what the Fed wants … and surely bad news for the U.S. housing market.
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Technically this development may be a very important one …
Long-term Treasury rates hit a low in December 2008. At the end of August 2010 they marked a secondary low, well above the former one. This may turn out to be a huge bottom formation, thus signaling the reversal of a secular downtrend that began in 1981.
The Stock Market Could Be Next to Reverse
A stronger dollar and rising interest rates are not good for stocks. Now we have both! So in my opinion, these two reversals are probably a harbinger for what’s to come for the stock market.
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The S&P 500 chart above shows a potential double-top forming. If I’m right, the next bear market may have started a few days ago.
General Advice Disclosure:
Please note that the advice contained herein is general advice and is for the purposes of education only. The risk of loss in trading futures contracts, commodity options, stocks, stock options and forex currencies can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You are reminded that past performance is no guarantee or reliable indication of future results. It has not been prepared taking into account your particular investment objectives, financial situation and particular needs.You should therefore assess whether the advice is appropriate to your individual investment objectives, financial situation and particular needs. You should do this before making an investment decision based on this general advice. You can either make the assessment yourself or seek the help of a professional adviser. This commentary is not a recommendation to buy or sell, but rather a guideline to interpreting the specified indicators. This information should only be used by investors who are aware of the risk inherent in securities trading. The Vulcan Report accepts no liability whatsoever for any loss arising from any use of this expert or its contents.liability whatsoever for any loss arising from any use of this expert or its contents.
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