This week's break of the U.S. Dollar Index below the critical support of 90 - 91 is a very serious development that could have ramifications for all financial markets. It looks like the devaluing of the dollar was triggered intentionally by the Trump administration's imposition of destructive trade tariffs to make U.S. exports more competitive. I seriously doubt that Mr. Trump or any of his advisers read or analyzed any financial charts before making this decision. If they had, they would have realized that the dollar was perched precariously on a dangerous ledge of support and was ready to tumble off if pushed hard enough. One can observe on a long-term chart of the U.S. Dollar Index that after breaking below 90, there is some weak support at 88 and then 86. If 86 is breached, there is really no support all the way down to 80 where there is again a major support line. Could the dollar fall close to 80? Yes, it could. We are now in the middle of a longer-term 5.5 year cycle in the dollar that is due to bottom sometime in 2020 (possibly 2019), and the projected target for that bottom is around 81 - 82.
The consequences of a dollar breakdown would be most significant in the precious metals market. A breakdown would cause the price of gold and silver to rise, possibly dramatically (assuming prices are not manipulated), especially as foreign investors could no longer regard the U.S. dollar as a "safe haven" investment (or at least the "least rotten apple" in the world basket of currencies). Precious metals would become the safe harbor investment of choice. Needless to say, it is no coincidence that the technical charts of both gold and silver are looking very bullish right now. I will write a bit more about this sometime over the weekend, but the bottom line here is that we should now be focusing heavily on going long in these metals. Short-term, both gold and silver seem to be correcting down from yesterday's high and could give us a good entry point shortly, perhaps next week. On the sidelines of gold and silver for now.
For many reasons, a collapsing U.S. dollar is not good for equity markets, and this gives us yet another reason to be wary of the current rally in the broad stock market. Nevertheless, this seemingly unstoppable "irrationally exuberant" market keeps chugging along as both the DOW and S&P 500 again make new all-time highs today. As I've mentioned in my recent blogs, we will watch next week for intermarket bearish divergence between the DOW, S&P 500, and NASDAQ (one or two, but not all three indices making new weekly highs) as a signal to go short. We are also keeping our eye on Feb. 2 -12 which is our next reversal zone (it starts next Friday) for a possible top in this market. Still on the sidelines of the broad stock market.
Crude oil prices continue to edge up this week and are now testing resistance at $66 - $67. We are still waiting for a corrective dip down low enough to qualify as a legitimate sub-cycle correction. If crude doesn't drop too far, we will be looking to go long as directional momentum is still nearly 100% bullish in this market. On the sidelines of crude oil.