FSU Editorial: "The U.S. Dollar Index" by James West 07/08/2006

THE U.S. DOLLAR INDEX
by James West
buythebottom.com
forever a student of the markets
July 8, 2006

BROAD MARKETS

Net-commercial position for the Nasdaq 100 increased slightly.
NASDAQ 100: http://buythebottom.com/ndx.html

Net-commercial position for the Dow Jones & Russell 2000 was virtually unchanged.
Dow Jones: http://buythebottom.com/indu.html
Russell 2000: http://buythebottom.com/rut.html

And net-commercial position for the S&P 500 decreased slightly.
S&P 500: http://buythebottom.com/spx.html

IF YOU can make some sort of conclusion here, please let me know because I cannot.

From a technical stand point: Except Nasdaq 100, the other indexes are holding above their “FED support” levels. It is going to be critical for the other indexes to hold at or above these levels, or else we stand to violate the June-lows and jump into a bear market head first.

S&P 500: 1245 – 1255
Russell 2000: 688 – 695
Dow Jones: 10 980 – 11 040
Nasdaq 100: 1540 – 1545 (*Level violated: Nasdaq 100 closed at 1533)

Like I stated before, as long as commercial net-long position in the Russell 2000 stays above the white line, I don’t see the markets violating their recent June-lows. The Nasdaq 100 net-commercial position has also perked up, and remains up even after the fed rally. On the other hand, commercials are rather heavy sellers of the Dow Jones. From where I stand, I still see crosswinds in the market. That is precisely why I am only slightly constructive on the markets, and even so remain largely in cash.

Again, none of this changes my longer term view-point: Inevitably, I think we are headed down.

Gold - http://buythebottom.com/gold.html

Nice rally in the yellow metal this week and looks like we are headed higher. Not sure if we will exceed the May highs, or consolidate/pullback first.

Oil - http://buythebottom.com/wtic.html

Oil is breaking above $75, but the commercials are not aboard the ship. They were boarding, but the ship left a little bit early. I am not sure how far up the stream the ship will go, but it will unavoidably return to pick-up the rest of the commercials. We will probably not see a sustained rally in crude before we see a pullback in price into the mid to high $60 range. Now, I am personally not against speculating long on some oil, but if I was a buyer of oil I would stay away from leverage and ALWAYS use tight stops. Oil can potentially put a rally in here, I just don’t see a sustain break out without commercial participation. (Sustained break out above $80 for example).

US DOLLAR INDEX

Looking at the chart above, consider these points:

Notice the green boxes on the chart, and the corresponding white “AREA” boxes on the COT chart. When commercials are buyers and large traders are sellers, usually sets up the market for a rally. This is basic stuff. Well, you guessed it, looks like the market is just about setup to rally in here.
Pay attention to the A1 – B1 – C1 pattern that corresponds to A2 – B2 – C2. Is history about to repeat itself?
Look at the red circles, commercial selling pressure PEAKS at market tops.
Now here is an important lesson, in late 2004 the dollar had a 10% decline. BUT commercials were net-long the market. However, commercials were not “heavy” buyers, but, the market declined none the less. This is an excellent example in terms of showing why stops are ABSOLUTELY NECESSARY.

Sorry I am running late, but I might go over this chart once more in the future.

Adios,
James

Updated weekly COT charts can be found @ www.buythebottom.com

Mailing list
I am organizing a mailing list to notify investors when I update the weekly cot charts and/or publish an article. If you would like to be added to the list, simply send an email to buythebottom (at) gmail.com and write “ADD” in the subject line. Conversely if you want to be removed from the mailing list once you joined; simply send an email to the same address and write “REMOVE” in the subject line.

CONTACT INFORMATION
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)

The opinions of FSU contributors do not necessarily reflect those of Financial Sense