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The economic position of the United States can be likened to a shopper who has maxed out their credit card and is waiting to see if the bank will allow them a credit limit increase. This is not the first time this has happened and no doubt it won’t be the last time that we hear of a major economy with these kinds of dramas.
August 2, 2011 is the deadline date for the US Congress to pass an increase to the US debt ceiling, which would effectively allow them to go further into debt. So what does this mean for financial markets?
Regardless of the decision, it is hard to imagine worse news for the US Dollar. The world has been aware of these issues for a long time and much (if not all) of the negativity has already been factored in.
I think the US Dollar has a lot further to fall in the long run but markets don’t just run up and down in straight lines. Barring any further negative news, we could see a US Dollar rally before the end of August.
Let’s take a look at the US Dollar against the Japanese Yen (FXUSJY in ProfitSource). In Chart 1 below I have included a Ranges Resistance Card (that I used in a recent Trading Tutors Newsletter article) highlighting the importance of the 50% level. Chart 1
click chart to enlarge
The March, 2011 low at 77.16 had the potential to be a yearly low but the market has not been able to make a strong higher bottom out of this low. Given the recent top beneath the 50% milestone, it seems the March low will be broken. The question is: how low will the Dollar go?
I am watching the 76.20 level, which would be a 100% repeat of the range down from the April top, as shown in Chart 2 below. Chart 2
click chart to enlarge
At time of writing (Wednesday morning, July 13), the Dollar/Yen has broken through the 50% of the range shown in Chart 2 and if it can hold below this level then the 100% milestone around 76.20 is certainly within reach.
The quarterly swing chart will also be around its 50% milestone at this price, as shown in Chart 3 below. Chart 3
click chart to enlarge
Finally, looking at Prime Numbers for this market we can see that 2,508 points (2 x 12.54) subtracted from the 2009 high gives a target area of around 76.37, while 1,881 points subtracted from the 2010 high gives 76.17 as a price target, as shown in Chart 4 below. Chart 4
click chart to enlarge
There are no guarantees in trading but we now have a price area to watch on this market as it approaches a couple of strong pressure dates in July and August.
Should the market form a nice higher bottom (or perhaps even a Double Bottom) out of this level, there may be some strong upside.
However, I see any upside move as only a bear market rally and not a new bull market. Eventually we will see a new top in place with a third - and potentially savage - bear market to follow.
The timing of the US decision sits nicely with the FX and Commodities Summit 2011 on July 30 and 31 in Sydney, where we will discuss these currency issues in greater depth and also build a roadmap of where any bear market rally might finish and how long that might take to occur. If you are in Sydney that weekend, come along to what should be an entertaining and informative couple of days.
Be Prepared!
Mathew Barnes
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