The Incredible Shrinking Dollar

I was wondering aloud earlier this year whether the very bullish long term setup for USD had a serious chance of playing out while Bernanke and the Fed were the guardians of the US Dollar's value. It looks as though that question may now have been answered, with the US Dollar collapsing under the double whammy of major QE starting in Europe and apparently in the US as well. I say in the US as well, as there seems to be a solid consensus that QE3 will be announced by the Fed tomorrow, and I'm assuming that must be due due to off-the-record briefings and pre-announcement spin by the Fed. We'll know for sure tomorrow.

Overnight the German Constitutional Court ruled that the ECB bond buying program could proceed, undeterred by the clear breach in spirit of both the German constitution, and the EU laws inserted by the Germans when the ECB was founded that were designed to avoid money printing. Nothing new there however, the Germans also insisted then that clear rules were made to prevent potentially insolvent countries from joining the Euro, and those were ignored by everyone subsequently as well. Why mess with a winning strategy?

As this is happening in the background the Euro is sort of collapsing upwards. It's worth having another look at the rising wedge on the EURUSD chart to note that the upside target on a break up is in the 1.34 area. In my experience rising wedges that break up are rather better at reaching target than ones that break down:

On the daily chart EURUSD has now broken over the 200 DMA. This isn't a firm break yet as historically on EURUSD it often breaks the 200 DMA for a few days and then reverses hard back through it. If we see a hard reversal back under the 200 DMA at the next big resistance area around 1.30 that would therefore look bearish. On the bull side, as I mentioned, the rising wedge target is in the 1.34 area, and I have the next big resistance level over 1.30 in the 1.35 area at a possible IHS neckline. A conviction break over 1.30 would therefore look very bullish:

The bull scenario on EURUSD fits better with the DX chart, as there is an M top target in the 78 area on DX at the possible H&S neckline there. For EURUSD to reverse hard at 1.30 that M top would need to fail:

SPX closed at the daily upper bollinger band yesterday, and normally any further moves up would hug the band and be smallish incremental moves. I'm not certain that means much this week however. The middle bollinger band is at 1414 and the lower bollinger band is at 1392:

On the ES 60min chart a very nice looking potential double top has formed that would target 1402 on a break below 1421. Worth noting from Bulkowski however that 65% of these never return to break the pattern neckline. I have short term rising support at 1430 and I'd be very cautious on the long side if ES breaks below there today:

The possible double-top on CL that I was looking at has now formed. On the bear side the broken rising wedge suggests strongly that the next big move will be down. On the bull side the Fed seems to be devaluing the US Dollar again, and that would boost the price of everything valued in US dollars. This could go either way IMO:

If the consensus of seemingly everyone that the Fed will announce a substantial QE3 tomorrow is correct, then we will almost certainly see a strong continuation down on USD, and most likely big resistance breaks on ES and CL. Until then ES and CL have formed very nice potential double-tops at resistance and EURUSD looks likely to test the major resistance level at 1.30 in the next day or two.

If the Fed doesn't announce QE3 tomorrow then the reversals on everything may well be severe. If QE3 is announced but is smaller than expected then we may find that it has mostly already been priced in and may then see a 'sell the news' reaction. We shall see.

In the meantime long entries just under major resistance are very risky, and short entries just before a likely announcement of a major quantitative easing push are also very risky. Cautious traders will be sitting this one out during the announcement.