Technicals indicate the S&P 500 will fail in its breakout attempt, writes Al Brooks....
Dismal Dollar Forecast
12/22/2006 12:00 am EST
In their latest newsletter, economic gurus Pamela and Mary Anne Aden perform a comprehensive analysis of the dollar, finding little to praise. However, they also offer opportunities in sectors that will benefit from the fall they are predicting.
"Since 2001, the dollar index has never been below 80. It's now near 82, so it's getting close. If it now declines and stays below 80, it would be extremely weak at a record low and the current bear market decline could then turn into a freefall.
"Our leading indicators are showing that this scenario is more likely than not. These indicators are both in negative territory, they're declining and they have plenty of room to fall further before they are oversold. This tells us that the dollar has a great deal of downside potential and since it's currently so close to 80, it'll likely fall much lower than that.
"It's been in a 35-year downtrend and has also been trading in a huge downtrending channel. Since the current decline started at the upper end of this channel in 2001, it's reasonable to assume that it'll end near the lower end as it has in the past. If so, that would give the dollar a downside target near .85 against the Swiss franc before this bear market is over, a 29% drop from today's levels.
"Whether it ends up dropping that dramatically or not over the coming years, we know it's headed lower. That means the foreign currencies will continue rising. We've been anticipating this upmove and our patience is now beginning to pay off. We believe these currencies are going much higher as the dollar heads lower.
"We'd keep all excess cash in the strongest foreign currencies. For now, the strongest currency continues to be the British pound, followed by the euro. But if you want to diversify, hold the Swiss franc too. The New Zealand and Australian dollars are fine as well. The Canadian dollar has been disappointing for several reasons, mainly the new tax measures. Although it should be rising with the metals and oil, it hasn't, and we'd rather sell it and focus on these stronger currencies.
"Although we can't prove it yet, our gut feel is that this could be a huge move in the major currencies. All of the ingredients are in place, including gold, which is poised to rise much further, and the currencies generally move with gold. But the 80 level on the dollar index will be the determining factor. If it doesn't break below 80, then we could see more sideways action. If it does, the dollar's decline could snowball."
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