READY FOR BREAKOUTS ?
Aksel Kibar
20 February 2009
US DOLLAR INDEX
Created in MetaStock from Equis International
Rational expectations is an assumption used in many contemporary macroeconomic models, and also in other areas of contemporary economics, game theory and in other applications of rational choice theory. In rational expectations it is assumed that the outcomes which are being forecast do not differ systematically from the market equilibrium results. It assumes that people do not make systematic errors when predicting the future and that deviation from perfect foresight are only random. However a major problem relates to the application of the rational expectations hypothesis to aggregate behavior - it is well known that assumptions about individual behavior do not carry over to aggregate behavior. The same holds true for rationality assumptions: Even if all individuals have rational expectations, the representative household describing these behaviors may exhibit behavior that does not satisfy rationality assumptions. (www.wikipedia.com)
The chart above analyzes the U.S. Dollar index between 1992 and 2009. In the second half of 2008, the dollar index reversed sharply from 70 levels. As an individual, one would have expected a weaker dollar during this period, given the negative outlook of the U.S. economy. However, the dollar rallied against major currencies. This was a strong rally that triggered many technical signals. ADIC's TECH TALK analyzed the U.S. Dollar index on the 21st of December and said: "The sharp rally in US Dollar index in the last quarter of 2008 generated important technical signals. In the following months we will test the validity of these technical signals. The first positive signal was a trendline breakout at 77 levels. The second bullish signal for the dollar was the moving average crossover. The Dollar index rallied from 70 levels to 88 levels in three months. In December, the dollar index pulled back sharply to test the moving averages and reached the 61.8% Fibonacci retracement at 77 levels. Short/intermediate term positive outlook remains intact for the dollar index. The validity of the technical signals and the further strength of the Dollar will depend on its stability above 80 levels." In the last 2 months, we have seen the dollar index stabilizing above 80 levels and testing the important resistance at 88.50. A break above this resistance will be bullish for the dollar in the intermediate term.
USD/TL
Created in MetaStock from Equis International
The Turkish lira is the currency of Turkey. The lira is subdivided into 100 kurus. The symbol is TL. The lira was introduced is 1844. It replaced the kurus as the principal unit of currency, with the kurus continuing to circulate as a subdivision of the lira, with 100 kurus = 1 lira. Because of the chronic inflation experienced in Turkey from the 1970s to the 1990s, the lira experienced severe depreciation in value. Turkey has had high inflation rates compared to developed countries but has never suffered hyperinflation. From an average of 9 lira per U.S. Dollar in the late 1960s, the currency came to trade at approximately 1.65 million lira per U.S. Dollar in late 2001. This represented an average inflation rate of about 38% per year. In its last few years the Turkish lira stabilized and even rose against the U.S. Dollar and the Euro. In late December 2003, the Grand National Assembly of Turkey passed a law that allowed for the removal of six zeroes from the lira, and the creation of a new currency. (www.wikipedia.com)
The chart above shows the USD/TL movement in the last decade. The USD/TL was at 0.3 levels in 1999. In the last quarter of 2001, it reached to 1.65 levels. The currency pair has been consolidating in a range in the last 7 years. During the same period, U.S. Dollar depreciated against many other world currencies. Supported by the disinflationary efforts in the Turkish Economy, the USD/TL was stable in the last decade. If we analyze the historical USD/TL movement we can see that the currency pair tested 3 times the long term resistance at 1.75 levels. Also the support range between 1.20 and 1.30 was tested 4 times during the same period. The USD/TL is now very close to the upper boundary of the 7 year long consolidation range. Consolidation periods are known as continuation patterns. During ranging activity, the volatility in that asset class decreases and this signals an approaching high volatility period. Breakouts from these type of long term consolidation periods are usually followed by strong moves. The important long term resistance is at 1.75.
BOVESPA (BRAZIL)
Created in MetaStock from Equis International
Wedge pattern, is a reversal chart pattern characterized by two converging trendlines that connect at an apex. The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. The loss of upside momentum on each successive high gives the pattern its bearish bias. The final break of support indicates that the forces of supply have finally won out and lower prices are likely.
The chart above shows Brazil's Bovespa Index. We can see the latest sell-off from 75,000 levels. The sharp drop pulled the index to 30,000 levels. After the sharp sell-off in September-November period the index rebounded to test the long term moving averages around 40,000 levels. The rebound formed a wedge pattern with decreasing momentum. The wedge pattern raises a red flag for the Bovespa index. If we analyze the long term chart, we see that the lower boundary of the long term trend channel is at 25,000 levels. The rising wedge pattern can be the continuation in the intermediate term downtrend. We will be watching two important levels to decide on the next intermediate term direction. The important intermediate term support level is at 38,500 and the intermediate term resistance is at 45,000 levels.
Aksel Kibar
Assistant Vice President/Portfolio Management
Abu Dhabi Investment Company
www.adic.ae
Disclaimer: Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. Any and all ideas, opinions, forecasts, market analysis or market data, expressed or implied herein, are for informational purposes only and should not be construed as trading recommendations to invest, trade, buy or sell securities and or speculate in any specific futures contract, option or any other market. Any investments, trades, and or speculations made in light of the ideas, opinions, and or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The market data contained herein is believed to be reliable, but has not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such is subject to change without notice. In no event will ADIC or any of its employees be liable for any information contained herein. Data Source: Reuters, Investopedia.
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