New Orders Index- strong but peaking

I have written already about the fact that the New Orders Index (component of the ISM PMI) is at peak levels but this time I wanted to show it another way, plotted as a quarterly 3-month average against the GDP. I am planning to show similar charts for other important economic indicators in the future.The red bar in the chart is based on an estimate for Q4 GDP.

So, it is peaking but this does not mean much for the economic expansion. Even lower levels still represent growth.

On the other hand, peaking also means strong and the stock market and the dollar will anticipate the continuation of tapering. This means a larger correction for the S&P500 soon.

The dollar - the "more monetary stimulus" hysteria

I previously commented on the dollar here. I was expecting a drop to the first important support level (lower blue line in the chart below). This expectation was formulated in the context of an extension of the market rally to 1450 SPX.

Weekly chart of the June contract for the US Dollar index. 

Since then, however, the SPX seems to have put in an intermediate term top and the dollar is forming a diamond chart pattern.

A diamond is a reversal pattern but I do not rely too much on the predictive value of chart patterns. I only take them seriously when the market is breaking out.


A break out may happen when the market realizes how foolish it is to already expect more monetary stimulus from the Fed. The deceiving employment report  has inflamed some impatient spirits.

The Fed does not change course from day to day. It can break the dollar rally but it would have to hint at it first. For now, all the hints where in the direction of no more stimulus.

The dollar

Here is the monetary policy guidance given recently by the ECB and the Fed:

> the ECB: 

"Owing to rises in energy prices and indirect taxes, inflation rates are now likely to stay above 2% in 2012, with upside risks prevailing".

> the Fed, through Ben Bernanke:

 "[...] the Federal Reserve's accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well."

I think the ECB is mistaking the rear-view mirror for the windshield, again. And the market is starting to react. 

Here is a monthly chart of the US Dollar June contract:

The dollar has been sold at the 81 resistance. It has support below 78.

This can be also seen on a weekly chart:

While on the daily chart a head and shoulders with break-down projects to 78:

Buy the US Dollar

source: ProRealTime.com

Here is a chart of UUP (black), an ETF tracking the US Dollar. Click to enlarge.

The indicator plotted in blue is an average of the monthly and bi-monthly rate of change (comcept inspired from Will Rahal's blog). Note that this indicator reached a level (green horizontal line) that corresponded to turning points in the past, thus suggesting a possible up move for UUP.

The average ROC reaching this level would hardly mean much by itself but there are 2 other developments that indicate a turning point for the US Dollar:

1. The most powerfull one is the shift in sentiment towards unfavoring the dollar. Here is some evidence. Also I have noticed that articles favoring other currencies (like Euro and Yen) have become very frequent recently.

2. Some downside in the stock market would be favorable for the dollar given the recent correlation. As stated in the previous post I am expecting a correction.

Consequently, I think UUP will bounce from the zone delimited by the two horizontal segments on the chart. 23.9 looks like a good entry level. This is a short term play (a few days).