FSU Editorial: "The U.S. Dollar Index" by James West 07/08/2006

THE U.S. DOLLAR INDEX
by James West
buythebottom.com
forever a student of the markets
July 8, 2006

BROAD MARKETS

Net-commercial position for the Nasdaq 100 increased slightly.
NASDAQ 100: http://buythebottom.com/ndx.html

Net-commercial position for the Dow Jones & Russell 2000 was virtually unchanged.
Dow Jones: http://buythebottom.com/indu.html
Russell 2000: http://buythebottom.com/rut.html

And net-commercial position for the S&P 500 decreased slightly.
S&P 500: http://buythebottom.com/spx.html

IF YOU can make some sort of conclusion here, please let me know because I cannot.

From a technical stand point: Except Nasdaq 100, the other indexes are holding above their �FED support� levels. It is going to be critical for the other indexes to hold at or above these levels, or else we stand to violate the June-lows and jump into a bear market head first.

S&P 500: 1245 � 1255
Russell 2000: 688 � 695
Dow Jones: 10 980 � 11 040
Nasdaq 100: 1540 � 1545 (*Level violated: Nasdaq 100 closed at 1533)

Like I stated before, as long as commercial net-long position in the Russell 2000 stays above the white line, I don't see the markets violating their recent June-lows. The Nasdaq 100 net-commercial position has also perked up, and remains up even after the fed rally. On the other hand, commercials are rather heavy sellers of the Dow Jones. From where I stand, I still see crosswinds in the market. That is precisely why I am only slightly constructive on the markets, and even so remain largely in cash.

Again, none of this changes my longer term view-point: Inevitably, I think we are headed down.

Gold - http://buythebottom.com/gold.html

Nice rally in the yellow metal this week and looks like we are headed higher. Not sure if we will exceed the May highs, or consolidate/pullback first.

Oil - http://buythebottom.com/wtic.html

Oil is breaking above $75, but the commercials are not aboard the ship. They were boarding, but the ship left a little bit early. I am not sure how far up the stream the ship will go, but it will unavoidably return to pick-up the rest of the commercials. We will probably not see a sustained rally in crude before we see a pullback in price into the mid to high $60 range. Now, I am personally not against speculating long on some oil, but if I was a buyer of oil I would stay away from leverage and ALWAYS use tight stops. Oil can potentially put a rally in here, I just don't see a sustain break out without commercial participation. (Sustained break out above $80 for example).

US DOLLAR INDEX

Looking at the chart above, consider these points:

Notice the green boxes on the chart, and the corresponding white �AREA� boxes on the COT chart. When commercials are buyers and large traders are sellers, usually sets up the market for a rally. This is basic stuff. Well, you guessed it, looks like the market is just about setup to rally in here.
Pay attention to the A1 � B1 � C1 pattern that corresponds to A2 � B2 � C2. Is history about to repeat itself?
Look at the red circles, commercial selling pressure PEAKS at market tops.
Now here is an important lesson, in late 2004 the dollar had a 10% decline. BUT commercials were net-long the market. However, commercials were not �heavy� buyers, but, the market declined none the less. This is an excellent example in terms of showing why stops are ABSOLUTELY NECESSARY.

Sorry I am running late, but I might go over this chart once more in the future.

Adios,
James

Updated weekly COT charts can be found @ www.buythebottom.com

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Contact Information
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)