Should the dollar weaken further and breakdown out of it’s pennant, it’s very likely stocks will set new highs for this bull run that began March 2009. With the prospect of deflation getting so much attention lately this would be a contrary outcome which, in my estimation, makes it even more likely to occur.
The chart above is a long-term view of the Dollar Index. The rallies and selloffs over the past few years look much smaller than all the buzz would have you believe. In fact, rather than major bull and bear trends all we’ve seen over the past four years or so is the formation of another pennant pattern.
As I’ve written before, the pennant is a continuation pattern that, in this case, suggests the Dollar Index should eventually trade below the low set in early 2008. What’s more, the dollar index and stocks have had a pretty close inverse relationship of late.
Don’t get me wrong, this is not a high-confidence trade; it is merely one possibility, suggested by the charts, that I am entertaining at the moment.