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The U.S dollar gains strength, may cause markets to crash
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U.S. Dollar has Bottomed
The U.S. dollar bottomed on Thursday, October 22, 2009, and has since rallied for three straight trading sessions. Art Cashin shared his insights with CNBC on the recent dollar rally.
Tug of War
Art said the big debate right now among analysts is deciding if the bull market will continue or if there will be a significant pullback. He said both sides are arguing vehemently, and it is uncommon for the brightest minds to be on opposing sides.
Dollar Trade May Bring about a 10% or Greater Pullback
He thinks the dollar trade may unwind which could cause shorts to scramble to cover their positions in the dollar. This could lead to a pullback of more than 10% in the equities markets. Lately, the market has been trading inversely to the moves of the dollar. It's kind of counterintuitive because a collapse of the U.S. dollar would crash the markets.
Right on the Money
A few months ago, I charted that the U.S. dollar would continue lower due to a bear flag pattern and eventually find support at the rising support level between $74 and $75. Last week, the dollar touched just below $75 and has since has had a powerful reversal.
Strong Reversal Patterns on Daily and Weekly Charts
The daily chart and the weekly chart of the U.S. dollar are showing strong southern doji reversal patterns. The daily chart has been confirmed, but the weekly chart needs to close near current levels of $76-$77 to confirm the pattern. This pattern is a sign of a strong reversal, and if the weekly pattern plays out, it would lead to a significant pullback in the stock market over the next couple of weeks.
Can a Rise in the U.S. Dollar Crash the Markets?
Interestingly enough, the Dow Jones Transports Index has double topped, and is pointing to a huge pullback or crash over the next week. The 2009 chart is almost a mirror image of the chart from 1987 leading up to the crash in October. The U.S. dollar is a good example of the damage that can be done after a double top is confirmed. The dollar broke down out of a double top in May, and has slid lower ever since. Rising unemployment and relatively subpar earnings have failed to bring about a strong pullback, but it may take a rise in the U.S. dollar as a catalyst to crash the markets. Go figure.
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