Ha-Ha! ...Say it ain't so, Joe!
Just when the masters of the universe and beloved financial engineers thought they had solved the financial crisis, contagion, and systemic risk with their 3 page scheme resulting from the Oct 27 EU Summit.......we find that the systemic risk has indeed spread as Italy's bond yields spike above 7% in less than two weeks following the schemes hatched at the Oct 217 EU Summit. Italian 10-year bond yield tops 7% AP

Key Observations:

1. Financial woes in Italy is a far bigger problem than Ireland, Portugal, and Greece. The dollar became a safe haven instrument in the 1st half of 2010 precisely because of the contagion risks presented by Greece's debt. Italy's financial woes being far larger than Greece suggests the dollar will once again become a safe haven currency. This implies that the Dollar peak at 8880 in June 2010 will eventually be breached during this budding financial crisis that is Italy.
2. Technically speaking, the dollar bottomed on the Oct 27 EU Summit at the 78% retrace, setting a secondary or higher low. With this higher low in place, the US dollar has begun to strengthen. The daily bar chart shows a Bollinger Band with a 65 day (13 week) time period on it. Generally speaking, the trend in the US dollar is defined by the slope of the Bollinger band 65 day period. When the slope is bearish, the dollar trend is bearish, when the slope turns positive, the dollar trend becomes positive. The band was positively sloped in 1H 2010, and is positively sloped again as of Q4 2011.
3. The embedded daily candle chart shows the dollar gapped higher on Nov 1, leaving a bull gap to the October close @ 7631 open. The return move to the Nov 1 bull gap low near 7660 was revisited on Tuesday and Wednesday of this week. The Nov 1 bull gap low near 7660 was further supported by the clustering of 1 month, 3 month, and one year moving averages. The test of the bull gap low was successful this morning, and the US dollar moved sharply higher, setting new highs for the month of November on the same day of the successful retest of the bull gap low.

Summary

The budding bull trend in the US dollar should strengthen in the coming weeks and months. The next order of business is to breach the Oct 4 (Q4 high) at 8043 and then the 2011 high set at 8163 on Jan 10 2011. The longer term target is to take out the 2010 yr high at 8880. The financial contagion in Europe should be mushrooming by that point, and could come sooner than most market observers think. Only a failure of the Nov 9 low at 7667 and a closing of the 7630 Oct 31 close gap would put this upside scenario in jeopardy.

Click on image to enlarge!

For more from John Bougearel, visit Structural Loginc.