What the Dollar Rally is Telling Me

FX: The one-week rally in the US Dollar is encouraging and if we can close the week above 89.50 in the US Dollar Index it will put the bulls on solid ground. Readers know that in January we rode the US Dollar lower via key commodity currencies. Following that rout we took 1/2 profits on these positions and began buying USD near the lows. We did this in CHF, JPY and CAD.

We've straddled the US Dollar quite well playing the "long/short" hedge. But the US Dollar is now in position to add to its gains. Recall from yesterday we said that we think a move in EURUSD below 1.2020 would be confirmation of a sustained move higher in the US Dollar. As we said earlier in the week, "It is imperative that the US Dollar continue its upward climb past key resistance at 89.50 and 90.50 in order to gain momentum and force the US Dollar bears to run for cover. Otherwise, a failed attempt to break above 89.50 (1.29 in USDCHF) could force another round of selling in the US Dollar.

We accurately forecasted a bottom in the US Dollar at 88.00 in the first week of January and were buyers when we hit this level two weeks ago. We then said to wait for a confirmed move above 89.50 to add to this position. If we see this on today's payrolls number we will add to our long USDCHF from an averaged rate of 1.2720.

To clarify, we list below our trades with some updated comments.

Jan 3: Short USD/MEX @ 10.63 -- Looking to add at higher levels possibly.
Jan 3: Long AUD/USD @ 07350 -- Closed 1/2 @ 0.7525. Will buy more on the dip to 0.7450
Jan 6: Long USD/CHF @ 1.2720 -- Bought on a dip to 1.2800. Will buy more above 1.2900.
Jan 9: Long USD/CAD @ 1.1660 -- Added at 1.1415 for an averaged rate of 1.1575.
Jan 12: Long USD/JPY @ 113.70 -- Closed out at 116.30 as indicated.
Jan 27: Long GBP/USD @ 1.7825 -- Closed last Friday at cost.

Recommended longs from 88.00. Look to add on a sustained move above 89.50.

Gold: No change: Gold looks like it is topping right now and should be headed sharply lower. Sentiment measures are at levels that preceded previous sharp declines. So with gold very overextended and ripe for a correction we think that an expected top in gold should ine up well with a strong rally in USD for 2006. This may be setting up for a reversal today.

We don't ever recommend selling gold. But traders may look to buy protection from put options. Aggressive traders may look to short on a break of trendline support at $565.

Stocks: No change: For the past week we have shown the same trendlines as we think that marks a key level for the market to hold. Having failed to move below 1245 we now need to take out 1290 to go higher. But the steepness of the rally from October coupled with the clear "five wave" move from the lows suggests a deeper correction at the very least.

For the bears to steal the ball we need to see a top in the S&P500 around current levels and a 'five wave' move down below 1275 and then key support at 1245. Once accomplished, we'd expect more selling pressure to follow. We still think traders can look to go short with risk limited to 1,300. But a more pragmatic approach is to wait for a completed "five wave" move below 1245 to confirm a top.

Go short with risk above 1,300. Add to position on a move below 1245.

Bonds: No change: Yields are moving higher again today which is technically a breakout of a multi-year downtrend. Notes also broke below key trendline support at 109 as expected and we have recommended shorts from 109. Key resistance at 4.5%-4.7% lines up with the key 107-108 level in notes. A move below here could really ignite some selling considering that the market is bearish on bonds but positioned the highest net long in 3 years (see this weekend's report for an explanation).

Recommended shorts from 109. Stops should be placed just above 109.15.

Crude Oil: Crude oil looks like it pulled back in an ABC minor "wave iv" correction the past few days and may be headed higher here to $70 or above. The wave count is a bit messy, but our overall outlook stands for a move to $80-$100 over the coming months.

Recommended long at $55 last November. Looking for a move to $80-$100 over the coming months.

Regards,
Jes Black

FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
www.fxmoneytrends.com

Jes Black is the fund manager at Black Flag Capital Partners and Chairman of the firm’s Investment Committee, which oversees research, investment and trading strategies. You can find out more about Jes at BlackFlagForex.com.

Prior to organizing the hedge fund he was hired by MG Financial Group to help run their flagship news and analysis department, Forexnews.com. After four years as a senior currency strategist he went on to found FxMoneyTrends.com - a research firm catering to professional traders.

Jes Black's opinions are often featured in the Wall Street Journal, Barrons, Financial Times and Reuters. He has also written numerous strategy pieces for Futures magazine and regularly attends industry conferences to speak about the currency markets.