There was a great article by Kathy Lien over at moneyshow.com where she makes the forecast and argument that the US dollar could drop another 5 to 7% and that the Euro could conversely rise another 5 to 7%.
The reason this article is important is because the almost perpetual and persistent advance in the SP500 has derived a lot of it’s energy from a slow and gradual falling dollar. Gold and commodities have also benefitted from this trend especially in the current near term time frame as it appears the gold price is moving into the parabolic stage.
But the main point of the article that I find key is the perspective that currency moves tend to be quite persistent and not that likely to change direction once a firm trend is in place.
She identifies this 5 to 7% range of advance (in the case of the Euro) and 5 to 7% decline in the case of the US Dollar Index and it is interesting to note that those levels correspond to the Euro hitting the resistance level near its previous major high and the US dollar hitting the support level of its all time low.
The Euro chart above clearly shows the currency is in a nice long term up trend and so that up trend is likely to continue somewhere in the range of 5 to 7%. You can see that it is chewing through the dotted blue line of previous major resistance level. If it is able to break out and up from there then it may do some sort of blow off run up to the next resistance level.
This would be consistent with both the broad market and the gold price doing a blow off run into the end of this year.
So this is the intermediate term perspective I think we need for the next couple of months. In my opinion it is a good framework to work with as far as making a determination when to expect the next major trend change in gold and the SP500. As Kathy Lien indicates in her article, it takes EXTREME moves in the currencies to get the central banks and policy makers to start taking serious action. They have to be pushed over the edge before they really clamp down. So far we have heard talk from US policy makers and the Fed about supporting a strong dollar, but no real concrete action. But once the currencies reach near extreme points, I suspect that will start to change and ought to cause some more meaningful market turning points.