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The life and times of the US dollar are dictating much of what we are seeing in terms of the global commodities market as well as the equity market. The value of currency is of course critical when buying or selling goods and services as the you can find yourself behind or ahead with a simple shift in the value of what you are paying with.
Much has been said of the commodities cycle recommencing as values are rising, this is simplistic as we can take oil for example stockpiles are actually growing not shrinking. That says demand must be declining but prices overall have risen? One factor is the declining US dollar, the majority of the worlds commodities are traded and priced in US dollars. If that currency shifts we will see that offset in the value of the commodity in real terms. In chart 1 we can use the code DX-Spotv from Profitsource as a chart to watch. We cannot compare US dollars to US dollars as the result will always be 1, so the exchanges handle this by creating a US dollar index which is a the US dollar weighted against a basket of currencies from around the globe.
In chart 1 you see how substantial the fall of the US dollar in relative terms to the other currencies has been in 2009. Volume has really increased in the last 3 months on this futures contract. This could be explained by more speculation or more likely hedgers trying to insure against further downside moves.
Chart 1 – US Dollar Index Daily Bar Chart
click chart to enlarge
One way to measure a market as we know is price action, knowing how a market is running in time David always said was more critical. We can see in Chart 2 the recoveries in the dollar index pricing have been short lived in price as well as time.
This market has not been able to move to the upside for more than two weeks based on calendar days. If you are up for the challenge look at the downside ranges in time and they will also tell you a very interesting story.
Chart 2 – US Dollar Index Daily Bar Chart
click chart to enlarge
To get serious about being long this market and essentially the US dollar as a trader I would be watching for this market to produce an overbalance in time to the upside. Those with David’s Ultimate Gann Course would be very familiar with this concept but in essence we need to see as sustained upswing that would be greater than the previous moves on average.
Until then we could see some more sideways or even downside moves. A simple case of support and resistance would have us looking on chart 3 to the lows formed in 2008. If that price action happened to line up with some strong time pressure it could the place to watch for a change in trend.
Chart 3 – US Dollar Index Daily Bar Chart
click chart to enlarge
The remainder of the year on this index will provide some good insights to the value of commodities and the overall equity markets.
Good Trading
Aaron Lynch
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