Wednesday, May 26, 2010

Dollar Primed for Collapse by End June: Charts

I hate being right.

    CNBC -

    The dollar's recent strength has been explained by most market analysts as a result of the euro weakness rather than any fundamental support for the greenback. In fact, a closer look at the dollar's chart - particularly the dollar index - suggests the currency may be primed for a collapse.

    The dramatic dollar index rise from $0.81 to $0.87 in recent weeks shows the chart's developed a dramatic and possibly dangerous parabolic trend. This trend has four important features.

    CLICK TO ENLARGE GRAPH
    Dollar Index Weekly Chart

    The first is the way it captures an acceleration in behavior. The trend starts slowly and then gathers speed, rapidly moving up with increasing volatility.

    The second feature is the shape of the curved parabolic trend rise. This is not a true parabolic curve because as the trend accelerates the curve changes shape until it becomes vertical. It’s the vertical section of the curve which is most useful because it provides a exact date when the trend will inevitably collapse.

    This type of trend line curve was first identified in the 1930’s and it was mistakenly called a parabolic curve. We continue to use the name, even though it is not an accurate description. In the 1930’s this was a rare behavior. In the last decade this curve has become increasingly common as volatility has increased in modern markets. This type of trend should not be confused with the parabolic Stop and Reverse indicator.

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