Year of the Dollar

My brother asked me near the end of 2011 what my top pick for 2012 was, and I told him that everything I was looking at pointed to 2012 being a very strong year for the US Dollar (USD). I added that it was hard to say where that would leave equities, though I'd be leaning bearish on balance. 55% of the USD index is made up of the Euro of course, and on my main weekly chart that is now nearing the neckline (1.195 area) of the huge possible H&S that I've been watching form for some years now. The only bullish setup on this chart was the rising channel from 2001, until that broke and retested broken support in the last three months.

This strength of the US Dollar muddies the picture on US equity indices somewhat this year, as they are benefiting from a strong flow into the US Dollar, some of which is flowing into US equities. This has meant that US equities have held up much better than foreign equities this year, and it's harder to judge where US equities may be heading as a result. Looking at EEM though, the emerging markets ETF, where I've been posting the possible huge H&S pattern forming there regularly since last October, the current move up from the June low looks like a bear flag, and we are really only waiting for a weekly close below rising channel support from 2008 for this setup to look extremely and immediately bearish:

The setup on my weekly TLT chart also looks bearish (for equities). Five year channel resistance was broken in May and broken resistance has been retested repeatedly over the last few weeks and has held, with TLT breaking up away from there this week. Obviously there's a potential double-top in play here but overall this setup looks strongly bullish for bonds, and therefore bearish for equities:

So where does that leave us in terms of SPX? Leaning bearish overall in my view. Key support at the moment is obviously at the IHS neckline at 1335, and until that is broken on a daily close basis then the IHS target in the 1403-5 SPX area is still in play. The uptrend looks fragile and corrective however, and if/when we do see a daily close much below 1335 SPX, I would expect to see at least a test of the June lows not long afterwards.

My holiday in 1990s Spain is going well, though most of my internet-capable devices have been left in the safe since we arrived, and that still feels very strange. I'm arriving back home on Wednesday after the market opens, and my next post will be on Thursday morning.