WATCH THE DOLLAR!!!

There are a lot of asset classes, sectors and stocks sitting at key levels. Normally, this has led to fast moves in either direction. He is my list of what to watch. I will do more than watch.

Here is a chart of the ETFs for Emerging Markets (EEM), High Yield (Junk) Bonds (HYG) and The US Dollar (UUP). This chart covers the bottoming process of Late 2008 – Early 2009. I use Emerging Markets, because they are the high-growth and commodity-based economies. I use High Yield Bonds, because they are the worst of the worst, on the brink of defaulting. These are the riskiest asset classes.

As you can see, risk benefits when the Dollar falls. That is the game plan – Crash the Dollar to drive the Prices of risky assets higher. The tops in the Dollar and the bottoms in EEM and HYG are within a day or two of each other (Green Vertical Lines). The final low in EEM and HYG was also the final high for the US Dollar.

The Dollar is now testing its downtrend line (Black Line and Arrow) from its March highs. EEM is testing its uptrend line and HYG has actually broken below its uptrend line. You can also see that these three securities have been consolidating for six to eight weeks. Something needs to give. It probably will give soon and the move will probably be very violent. And then may quickly reverse with equal violence…

I want in on the move – regardless of which way things break. If the relationship holds, then a break lower in the Dollar drives risky assets to new highs. It also drives Foreign Currencies to new highs. My guess is that a break of the trendlines leads to all hell breaking loose in risky assets and probably a major short squeeze in the US Dollar.

Commodities
Here is a chart comparing the ETF for the Metals & Mining Index (XME), Crude Oil ($WTIC) and the Baltic Dry Shipping Index ($BDI). You could substitute a number of commodities for XME (MOO for example). They have all peaked at about the same time and have been basing for over three months. $BDI is down 50% from recent highs! You’d better buy right in this market.

See how Crude and Metals bottomed at the same time the Dollar topped in March? Crude Oil ($WTIC) is now hugging the uptrend line. Something has to give soon. WATCH THE DOLLAR!!!!!!!

Oil Stocks (XLE) continue to hang out in a now eleven-month base. Remember, the bigger the base, the more fuel there is for the next breakout/breakdown. XLE has been lagging the other risky asset classes, but I am assuming that if it breaks out, then it will lead.

China
Here is the chart of the China “A Shares” Closed End Fund (CAF). It has broken support and now sits below its 5-month trading range. It seems to be an ideal short, but there have been so many of these false breakdowns lately that have led to massive short squeezes. I would not short anything until the markets top and roll over. Watch what happens if CAF trades above $32.50 over the next few days. I will be watching it closely!

South Korea (EWY) is closely tied to China. Look at how EWY is sitting tight here in a 6-week base. Note the big volume the last 2 days. I have seen a lot of breakouts preceded by big volume days like that.

Gold
Everybody is talking about Gold. Gold is the anti-paper Currency. Here is a chart of the Swiss Franc ($XSF), Gold ($GOLD) and the US Dollar ($USD). The Franc (and other currencies like the Euro, Loonie, Aussie) and Gold have the potential to break out of major trading ranges. The US Dollar has the potential of failing miserably.

Failure by the Dollar and a major breakout in Gold to new highs causes some significant policy problems for the USA, so I would not be surprised if some strange things happen to Gold and currencies on breakouts.