Will The U.S. Dollar Rally Continue?
Pundits everywhere are in an uproar over the recent strength of the U.S. Dollar. Could this be the end of years of USD weakness? Is there finally light at the end of this tunnel? Is the greenback about to make a comeback?
OK, it's time for a reality check. Here is a daily chart depicting the past 12 months of activity in the Euro – U.S. Dollar currency pair. In currency trading, the chart follows the first member of the pair, so you are seeing the Euro climbing relentlessly vs. the U.S. Dollar. No indicators are needed to show the damage heaped upon the buck by its European counterpart over the past year. When we step back and look at the recent activity in this perspective, the pullback is a shallow move indeed (see figure 1).
Figure 1: EUR/USD pulls back after running higher for the past 12 months. Source: Saxo Bank
Is it possible that the USD could continue to strengthen and turn this into a major retracement move? It's possible, but it hasn't happened yet. The next time you see or read about the mighty greenback, take a look at the chart to gain perspective. Sometimes, we have to take what we read and hear with a grain of salt.
Worst Trade Ever!
During a recent trip to Singapore, I was interviewed by the top local newspaper, the Singapore Straits Times. The most interesting question pertained to my worst trade ever and my best trade ever. The following is an excerpt from the interview, which appeared in the business section on Sunday, May 4.
Singapore Straits Times: What has been a bad investment?
Ed Ponsi: I once had a really good investment that turned sour because I held it too long. I bought 500 shares of a tech stock way back in 1996, and it just kept splitting. After a series of two-for-one and three-for-two splits, by 2000, my little 500 shares had grown into 4,500 shares, and then the company's share price climbed to nearly US$100! I began to scout around for some beachfront property.
Then, for some reason that I still cannot fathom, I decided to continue holding on to the shares - after all, holding the shares had worked up till then, right? I had no exit strategy, a classic mistake of a beginner. So, I held the shares instead of buying the beach house. As you can guess, the Nasdaq imploded soon afterwards and my gains evaporated. Meanwhile, I'm sure the house doubled or tripled in value as the tech bubble was ending and the real estate bubble was just about to begin. That one still hurts.
Singapore Straits Times: Your best investment to date?
Ed Ponsi: Shorting the US dollar. If you go back and look at every article I've written and every television program on which I've appeared, you'll see I've been consistently calling for a weaker US dollar since early last year. At no point have I purchased US dollars or recommended their purchase. Instead, I've constantly enumerated all of the many reasons why traders should short the US currency.
While this strategy has been consistently profitable over time, the last three months have seen a dollar collapse of epic proportions because of the Fed interest rate cuts, the mortgage mess and the Bear Stearns bailout. All of the ingredients were there for everyone to see. You would have to be blind not to see it coming, and it's not over yet.
Question of the Week
Q) Hi Ed, I read you in the Singapore newspaper today and have interest in the things you wrote. You said in today's paper that we should not hold USD but hold things that are valued in U.S. Dollars. I also listened to the CNBC interview in April, about gold possibly dropping to $800 per ounce. I am new to gold investments and am curious and want to learn why you said that because the two pieces don't seem to fit together in my mind.
Ed Ponsi) Thank you for your question. I think the recent fall in the price of gold is just a pullback within a larger uptrend; the question in my mind is how far will the pullback run before the uptrend resumes? Gold has been a terrific investment for the past few years, and if Bernanke and the Fed continue to cut interest rates and pump liquidity into the markets, the U.S. Dollar should continue to fall and conversely, gold should continue to rise. On CNBC, I was asked for a shorter term perspective, and I was presented with a chart that reflected that. Gold is still well off of its highs, and could pull back further in the short run. A quick look at the gold daily chart reveals what appears to be a head and shoulders topping formation, a bearish reversal pattern that foreshadows a potential deeper pullback. Gold is also maintaining its position solidly beneath its 20-day exponential moving average, another sign of weakness. There are several potential support levels, with one of them being the technical and psychologically significant level of $800 (see figure 2).
Figure 2: Gold may be forming a head and shoulders topping pattern. Source: Saxo Bank
I still think a break of the $850 level could result in a pullback to the $800 area, because very little support was created during the quick run higher. The March spike above $1000 proved to be short-lived, leading to profit taking and a pullback, but in the long run, gold and other commodities probably will continue their ascent. Thanks and good luck!
Quote of the Week
Charles Payne, a regular contributor on Fox Business News, had this to say about the demise of the proposed Microsoft – Yahoo merger, which fell apart over the weekend when Yahoo rejected a sweetened bid of $33 per share. "It's like combining the New York Knicks and the New Jersey Nets," said Payne. "You still won't have a championship team." Ouch!
By the way, an MSFT – YHOO deal might still be possible; Yahoo wants an offer of $37 per share, while MSFT has offered $33 per share. With the two sides this close, Microsoft's tactic of abandoning the deal might be yet another negotiating ploy; Yahoo stock is falling to $24 per share in response to the news, making that $33 offer look better and better. Meanwhile, Microsoft stock is rising, which tells us that the market didn't really like the deal all that much, but don't be surprised if talks are revived over the next few weeks. My impression is that Microsoft really wants this merger, and will eventually strike a deal, regardless of what the market believes. CEO Mike Ballmer almost seems to be taking this personally, a sort of "how dare you refuse us" attitude combined with an approach that can certainly be described as heavy handed. Will Yahoo continue to resist Mr. Softie's charms? Stay tuned, only time will tell.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
|
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through 