Here's what's next for the Dollar Index

FX:

We mentioned recently how USD/CHF was in breakaway mode after rising above key channel resistance at 1.3030/00. Our long USD/JPY from Sunday night at 1.16 is also up 130 pips.

Our trading position from last week was long USD/CHF from 1.2810. A good technical objective for today is 1.3180. This is the upper channel resistance from the rally from 1.28 as well as the 78.6% (square of 0.618) retracement of the 1.329 to 1.279 decline. As such, we closed this trading position at 1.3160.

We remain long our core long position from September with an averaged rate of 1.2930. We expect a move to 1.40/45 over the coming months.

In the dollar index, we said, "A move above 90.50 this week will be needed to put things back on track for the dollar. As you can see, while 90.50 failed to hold (and negated the good looking inverse head and shoulders pattern), key channel support at 89.50 acted held up. Only a move below 89.50 would negate the near term bullish stance and only a move below 87 would force us to revise our outlook for 2006."

While we got the move back above the 90.50 level today, the EUR/USD selloff still remains relatively subdued. EUR/USD needs to break below channel support today at 1.1850 to give the dollar index a similar break through channel resistance at 91.80 (blue line). So far, we are sitting right on these levels this morning and the moves in USD/CHF and USD/JPY this morning suggest it will be broken today and sitting to the outside of channel resistance and above the 90.50 support by the close.

Stocks:

No change: The S&P's sharp drop on Monday puts into question the idea of an expected "wave v of 5" rally in the Dow to put a cap on the ending triangle pattern that has taken two years to develop.

As such, we are now considering that the S&P500 has completed the targeted move to 1270 (recall that this became our target back in November when it was clear that the 1160 level was not going to break). Key Fibonacci resistance turned support is at 1245. So a move below here in "five wave" form from the 1273 highs would go a long way to confirming that a top was at hand.

Readers should recall that just about every "contrarian" indicator we follow is screaming for a top in stocks. The only concern we have is whethere globally the market is done. This was the main reason that US equities caught a second wind this year.

We have not gone short the market yet, but feel that aggressive traders may look to do so with risk limited to just above this week's highs. A bearish weekly reversal on Friday would be the first indication of more weakness to come.

Bonds:

No change: Last Tuesday we wrote, "Yields look to be trying to turn higher today and this would be consistent with our work that shows yields had bottomed last month just as the 30-month cycle in Treasury yields bottomed which means we should expect higher yields over the coming months if this holds any sway. Key support is at 4.4%. Only a sustained move below 4.4% would suggest a larger retracement at hand."

Regards,
Jes Black

FX Money Trends
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Hoboken, NJ 07030
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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.