The Dollar Needs Support

The market declined yesterday, and it was our leaders that were hurt the most. Technology, once a proud leader of the bulls crashed 1.4% yesterday. Comparably, basic materials, our leader of the bears fell by the same amount. When former leaders turn into top laggards, the indices are in trouble. All stop losses have been updated to protect our long trades.

Since February 23rd, I have operated under the view that we had just put in a short term high, but the longer term bullish trend is in tact. Therefore, until the long term trend changes, we need to continue to add to longs on dips; but keep stop losses conservative should the bears take the market lower.

Our numbers to watch are fairly straight forward. On the Nasdaq 2700 is first support and the index will have support at 2665, and 2600 if that fails. The SPX has first support at 1301, then 1280 , which I expect to be tested, and lastly a must hold support of 1250.

Thus far none of those support zones have failed.

The bears will get some help today, but not from the U.S. news. According to Fitch, China has a better than 60% chance of having a banking crisis by 2013. While that may seem unimportant (and it is) long term investors should use that data to make long term investment decisions. If Fitch was calling for a recession, it's not news, but a crisis. That's bold.

But more near term, the bears could gather momentum this week if the debt auctions of Portugal, Greece and Spain are poorly received. Already this morning yields in Europe spiked in anticipation of a weak auction. Not only will this impact European banks (which trickles to the U.S.) but it impacts the euro, which has gained substantial ground on the dollar.

As many of the veteran subscribers know, I am long term bullish on the dollar, but in the near term I have been bearish for many weeks. My long term bullish outlook was established in December of 2009 when I called for a bottom. At the time I was looking for support at the 2008 low to hold and rally the currency higher.

After over a year, the folks at RBC, one of the biggest banks, finally echoed what I have said the whole time. They even adapted my, "the dollar needs to hold it here line or else it could collapse" analysis. Here is the chart they unleashed this morning to the public.

click to enlarge

Our analysis is the same, for the most part. Although they are more concerned with $76.50 where as I have placed $74 as the must hold level. Additionally, they expect a strong shift (in sentiment) if the dollar breaks through support. Sentiment is another way to say the dollar would collapse. While it remains to be seen what price the dollar will charge to, it is great to see that the world's 12th largest investment bank has the same internal playbook as our subscribers have used for the past year; maybe I should apply at RBC Capital.

I went over the dollar again in last weekend's video. The weekly videos are posted to the website. Video one highlights the market activity, while video two goes over select stock setups. I recommend you watch both videos this week here.