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Positioning for (intermediate-term) dollar weakness

By now, almost everyone throughout the financial landscape is aware of the relentless rally in the dollar that has been taking place since early May of last year. During the past 10 months the US Dollar Index rallied from 79 to over 100! To help put that into perspective that’s an increase in the value of the dollar of over 25% in less than one year. The dollar strength that we at GFC have been witnessing over the past year has truly been remarkable. Recently however, technical developments are indicating a higher probability of the dollar taking time to catch its breath before the bull-trend in the buck is ready to fully resume.

As you can see in the chart below. The dollar spent the month February in a consolidating triangle pattern. It broke topside out of this patter in early March to close over the 100 level for the first time since April of 2003, the highest the index had been in almost 12 years. It was indeed a major accomplishment for “King Dollar”. An important guideline to remember in Elliott Wave Theory is that thrusts from triangles are often terminal, and the subsequent bearish price action since the dollar reached the 100 level has reinforced this belief held by Elliotticians. We at GFC are expecting additional dollar weakness to resume over the next 3-4 weeks with the 94.00 area as an initial downside target with additional dollar weakness possible.

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Recently, GFC has been monitoring bullish developments within the precious metals markets, particularly in gold and silver.   Admittedly, both gold and silver have lost a lot of their luster as they have each experienced a continuous bear market since late 2011. Both markets saw re-tests of their previous lows in March and have each subsequently staged nice rallies against the backdrop of the aforementioned dollar weakness.  Sentiment towards gold and silver remains at a bearish extremes with very few people expecting gold to rally.

Taking a closer look at gold, we can see that prices successfully tested gold’s previous low around $1,141 from back in early December.  It then rallied strongly up to $1,219, experienced a 50% pullback, and resumed its bull-trend with conviction yesterday.  Gold seems to be tracing out a corrective Elliott wave pattern known as a flat correction. Flat corrections are A-B-C patterns that have internal wave counts of 3-3-5.  We have labeled the chart accordingly to help readers visualize the pattern.  Sections A, and B, are miniature a-b-c structures with wave C developing into a traditional impulsive 5-wave Elliott wave sequence.  We are expecting gold to make a sharp run towards the wave A high of $1307 an ounce in the weeks ahead.  How prices behave in this target area will help determine any additional bullish potential for gold.  (Please be aware that the bullish setup and price pattern in Silver is strikingly similar) Dollar weakness should play a contributing role to the rise of both of these metals in April.

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Oil is a commodity which, relative to last year’s dramatic price decline, has stubbornly stabilized over the last 3 months.  As you can see from the chart below, the trajectory of oil’s drop since early January has noticeably slowed.  Similar to gold and silver, oil displays a strong bullish engulfing candlestick pattern from around the 50% retracement level of its most recent rise.  Additionally, notice the volume earlier this week as the volume contracted during the 3 day retracement and seems to have resumed yesterday despite it being a light trading week because of the Easter holiday.  Negative sentiment regarding oil is at an extreme.  With most trend following traders and hedge-funds having shorted oil, it seems as though we could see a sizable short-covering induced rally.

The financial press has been quick to rationalize a continued decline in oil.  Particularly, the Wall Street Journal has been running front-page stories about the pending Iranian-nuclear deal which would reduce economic sanctions and enable Iran to sell significant amounts of oil to the world.  If this were to occur, it would add to an already overwhelming oil supply surplus.  Astute market observers should be able to look at the recent price action and conclude that the potential of additional barrels of Iranian oil being brought to market is already fully priced in to the market.   Therefore, any fundamental news related to the delay, or potential cancelation of this agreement should talks dematerialize, will likely produce a bullish reaction in oil prices.  Just today, we saw that the deal is likely to be delayed further into the future as U.S. Secretary of State John Kerry extended the duration of his stay in Switzerland with tired hopes of being able to reach a deal.  The oil market traded today as though the deal will fail or at least be delayed.  A weakening dollar is also likely to contribute to a rise in oil prices.  GFC maintains its previous cited price target above $58.

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One industry that is projected (almost universally) to reap significant benefits from depressed oil prices is the aviation sector.  Our curiosity regarding this widely held belief led us to conduct a stock screening of some of the leading domestic airline stocks. One stock that captivated our attention by appearing particularly vulnerable at this point in time is Delta Airlines, Ticker Symbol: DAL.   As you can see in this chart, Delta has been consolidating from its highs having used the $43 area as support multiple times.  Each time Delta’s stock price touches this area it becomes more and more likely to break.  Additionally, Delta has two gaps sticking out like sore thumbs waiting to be filled beneath this support area.  Finally the high volume swing point from the middle of October last year around $30 is likely to get tested eventually.  High volume swing points such as these tend to get tested eventually. They act as a magnet for the market to revisit over time.   It is GFC’s strongly held belief that DAL is likely to come under considerable selling pressure if/when prices close substantially below the $43 area.  Additionally, the intermediate bounce in oil we are forecasting isn’t likely to provide shareholders of DAL any favors.  GFC recommends shorting DAL with an initially price target of $36 with a stop loss at $46 (further bearish potential exists).  At this time we recommend investors positions themselves for the overall effects of dollar weakness and adjust their portfolios accordingly over the intermediate-term.

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Phil Olson has been a devoted student of the financial markets since childhood. With over ten years worth of experience trading various investment products, he has developed an insightful way of discerning the price behavior of the market. His trading career took off when he proved to be on the correct side of the 2008 financial crisis by shorting stocks such as Lehman Brothers, Fannie Mae, and Freddie Mac. Since 2009, after capitalizing on the crisis-driven downdraft in financial stocks, he turned his attention to the foreign exchange market and became a successful currency trader. His extensive educational background in the areas of business and finance has afforded him the benefit of being able to apply two types of analysis (Technical & Fundamental) simultaneously to the market in order to identify high-probability trade opportunities. With his distinct and complementary approach to navigating the investment landscape, Phil became a trusted source for financial advice among his family, friends, and co-workers. Prior to partnering with Matthew to create GeoFront Capital, Phil Served as a Captain in the United States Air Force as a Contracting Officer responsible for authorizing, writing, and administering multi-billion-dollar contracts between the Air Force and the Aerospace Defense Industry. His successful experiences in handling large amounts of fiduciary responsibility on behalf of both Congress and the American tax-payer lend themselves well to the financial advisory services of GeoFront Capital.

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