Strong Dollar?
Updated Feb 2023
It is said that the economy usually mimics the copper markets. Upon examining the above chart of copper, it appears that the economy and copper are trending in the same direction. Copper is now closer to a bottom than a top; hence, we can infer that the markets are also close to putting in some bottom if one takes a long-term perspective.
Copper started putting in a top formation as early as May of 2007, though the accurate correction only began to gather steam around July 2008. It is now giving the first signs of a long-term bottom formation, even though in the short-term, there is a possibility it could momentarily spike down to the 105-110 ranges.
Strong Dollar & Copper: The Technical Outlook
The ranges between 141-144 have been a strong zone of support for copper. However, once this zone was violated, support turned into resistance. Despite this, copper was able to rally above 144 after briefly dipping into the 125 range. This indicates that this long-term zone of support is likely to hold on a monthly basis, suggesting that copper is closer to setting a long-term bottom rather than a long-term top.
From a long-term perspective, the current pattern suggests that copper is setting a long-term bottom. Therefore, traders may want to consider taking small positions in some of the key players in this sector. If copper were to trade down to the 110 range, traders should view this as a long-term buying opportunity. A close above 160 would significantly reduce the likelihood of copper trading down to the 110 range.
Copper often puts in a bottom well before the markets, providing an early signal of a potential change in market direction. During the strong correction from 2000 to early 2003, copper-bottomed towards the end of 2002, well before the markets and the general economy. Hence, a change of direction in the copper markets could provide the first signs of a turnaround in the markets and possibly the economy.
Do Fundamentals Support A Strong Dollar Outlook
With the massive amount of new infrastructure that both China and India need to develop in the coming years, not to mention the billions of dollars that the Obama administration is allocating for the maintenance and development of new infrastructure-related projects, long-term demand for copper is set to remain robust. Copper recently experienced a significant correction of over 68% in roughly six months but is unlikely to stay at such low levels indefinitely.
Traders looking to capitalize on this trend should consider opening small positions in top players in the sector, like PCU and FCX and using strong pullbacks to add to their current positions. However, it is important to exercise caution and not make impulsive decisions. Money management and patience are key ingredients to success in the markets. Individuals who remain patient and disciplined are usually handsomely rewarded, while those who are rash and greedy usually regret their decisions.
USD Bottom Close at Hand?
Provided the dollar can meet the two conditions listed below (Dollar targets), it has a strong chance of testing its previous highs and possibly reaching new highs before undergoing a significant correction that could last until the end of 2009. Typically, a market that experiences a strong rally does not collapse abruptly, but rather undergoes a rapid pullback followed by a powerful upward move (blow-off top) and then a more orderly pullback that may lead to new all-time lows.
To establish a short-term upward trend, the dollar needs to remain above 78.70 and rally beyond 84. This entire pattern may take between three and six months to complete. Traders bullish on the dollar may open long positions using the UUP ETF (dollar bullish ETF) or short the Euro through DRR, as the Euro usually moves in the opposite direction of the dollar.
Dollar Targets
As previously mentioned, if the dollar hits 81, it is expected to experience a relief rally that will take it back to the 83.00 range. However, if it fails to do so, it is likely to trade down to the 75-78 range.
In a market update as of December 16, 2008, the dollar had traded as low as 78.77 but has since rallied. For this rally to gain momentum, it must meet two requirements:
A) It cannot close below the previous low of 78.77.
B) It must trade above 84 for three to six consecutive days.
It’s important to note that while a rally may occur, traders should be aware that the dollar’s rally will likely be short-lived and may end the year on a lower note, possibly hitting a new low before the year’s end. As a result, bullish traders should consider closing any positions when the dollar tests its old highs.
It is worth noting that no matter how robustly the dollar rallies in the coming weeks and months, the rally will fail, and the dollar is likely to end the year on a lower note, conceivably reaching a new low before year-end. Therefore, traders who are bullish on the dollar should consider closing all positions when it tests its previous highs. Tactical Investor May 2015
Research Articles on Strong dollar & Market Relationships
These articles explore the relationship between a strong dollar and the stock market, examining how the dollar’s strength can impact corporate profits, exports, and global markets. They also discuss the potential benefits and drawbacks of a strong dollar for investors and offer insights into how traders might respond to dollar value changes.
- “Strong Dollar, Weak Stocks? Not So Fast” by Ben Levisohn (Barron’s, 2021): https://www.barrons.com/articles/strong-dollar-weak-stocks-not-so-fast-51612155843
- “A strong dollar can help or hurt the stock market – depending on how you look at it” by Patti Domm (CNBC, 2018): https://www.cnbc.com/2018/02/15/a-strong-dollar-can-help-or-hurt-the-stock-market-depending-on-how-you-look-at-it.html
- “The Strong Dollar’s Impact on the Stock Market” by Arielle O’Shea (NerdWallet, 2018): https://www.nerdwallet.com/article/investing/strong-dollar-impact-stock-market
- “The impact of a strong dollar on the stock market” by Paul R. La Monica (CNN Business, 2018): https://www.cnn.com/2018/03/21/investing/strong-dollar-stock-market/index.html
Our greatest glory is not in never falling, but in rising every time we fall.
Confucius BC 551-479, Chinese Ethical Teacher, Philosopher
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