Cycles review, Part XI: Economic Confidence Model - and what about the U.S. dollar?! with review from Martin Armstrong

Martin A. Armstrong developed the Economic Confidence Model, and he's been pointing out that it does not necessarily correlate to equity markets but rather to economic confidence. Which can be observed in various ways and will show up as highs or lows in different markets at different times. Personally, it seems to be it has a fairly good correlation to swing highs and lows in the volatility index (VIX), but he's pointed out correlations with the real estate market and apparently relates it to important level in other markets such as currencies, with the dollar. Below I'll present some new information from a "Market Outlook" newsletter Armstrong apparently wrote or published May 1, 2009 (available at http://www.scribd.com/mobile/documents/15095650) that addresses a number of economic issues, including reviews of various currencies. But first, below are depictions of his Economic Confidence Model:

Additional background information is included in prior posts (use the "Confidence Model-Armstrong" label in the labels list) and there's even a Wikipedia article about him (check Wikipedia under Martin Armstrong).

Armstrong's May 1 "Market Outlook" addresses currencies in particular, including correlations to dates projected by his model. Since the dollar hit a symmetry target low today, and there's a substantial question whether it will find support or not, let's take a look at what Armstrong's newsletter says about it (at pp. 14-15, including his dollar index chart, below).

"The Dollar World"

The major high in the dollar was actually reached in late 1932 during the Great Depression. Virtually all of Europe defaulted on its national debt, with the exception of Great Britain and Switzerland who entered into a moratorium suspending interest payments. This sent the US dollar to record highs on a flight to quality perspective. Of course the US politicians saw this as a threat to the economy and supported Protectionism. That response was akin to the arab blocking off the access to the Mediterranean that then thrust deep into the heart of Western Europe the end of trade and imposing a dark age where everything was lost right down to language.

The monetary cycle frequency tends to be 37.33 years and if we add this to 1932.8, we come to 1970.13. This is where there had existed a two-tier gold market - (1) official price for settlement between nations, and (2) the free market price on the London Metals Exchange. In 1970, this is the first time that gold actually fell below the official price of $35 on the free market. This was clearly a major high for the dollar just before the crash and burn that followed the next year when President Nixon closed the gold window and this began the floating exchange rate system. We add this and we come to 2007. This appears to have produced a cycle inversion insofar as instead of a high for the dollar, we have a major low. To the shock of most, the dollar then rallied from the first turning point on the Economic Confidence Model being 2008.225 (March 23rd, 2008). From there as we then approach the next minor turning point of April 19th, 2009, the dollar has declined marginally, but between the 1970 high, the next low for the dollar was in 1974, a rally into 1976, and the decline into 1980. Keeping the turning points in time, this projects the next big turning points to be 2011, 2013, and 2017.

The 2011 target lines up with the Economic Confidence Model as well so where we find these convergences, they tend to be the real important swings and turning points. The question that seems to be open, is shall this be a high or a low? Can we really see a rally for the dollar last that long into ideally June 13th, 2011?

The Monthly Chart provided for the ICE Dollar Index shows the low that was formed with the Economic Confidence Model 2008.225. I have provided the two main channels to watch. The First Broad Channel is constructed by taking the high on the major turning point in July 1998 just prior to the collapse of Long-Term Capital Management and tied to the 2008 low in March with the current Economic Confidence Model Wave. This broad channel is then formed by taking the parallel to the major high in 2002 that was also in line with the nadir of the last wave 2002.85.

This Broad Channel stands at 99 in April and scales downward to reach about 96 by the end of 2009. Another parallel is formed then by using the reaction high in December 2005. This is providing a keen monthly closing support level to watch for the y ear. The Index penetrated it in December, but it still held this support for the close. It appears that a monthly closing above about 91 will signal that the dollar is going to rise sharply and believe it or not, could actually exceed the high of 2002 going into 2011 as nuts as that may sound.

The only explanation for this ... would tend to suggest a sharp decline in the economic prospects within Europe and Russia. ...

Of course, the dollar historically rises in periods of sharp economic declines as long as tangible assets, debt, still tend to contract in value. The real estate market still does not appear bullish and the fact that J.P. Morgan and Goldman Sachs are trying so hard to depart from TARP, we may yet see another collapse in the Investment Banking system ...

The Second Channel is constructed from the low of the 1998 Long-Term Capital Management Crash connecting this to the high of the reaction rally into December 2005. Parallels are then taken from the low of 1995 where the yen made its major high, the low in January 2005, and then the bottom is the major low in 2008.

Looking at the Second Channel, we can see that the dollar has exceeded both these mid-range parallels and has been holding above them on a monthly closing basis. This outlines key support forming technically in the 81-82 range for the balance of the year.

Holding the 81 level on a monthly closing basis seems to be setting the stage for at least some consolidation right now. If we begin to see the dollar index close on the ICE below 79 on a monthly basis, then we may see a dollar decline into 2011. But for now, both economics and geopolitical factors may still favor the United States going into the months ahead.

That does not negate the potential for a sharp rise in gold. We may still see gold rise significantly as the only real viable option to the dollar.

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Here's my monthly chart of USD - the lines I drew aren't the same as Armstrong's, but I admit I was just taking some guesses at the time. I might apply Armstrong's to it:

Thinking about how Armstrong drew lines on the dollar's chart, and in light of his comment, I am thinking of a new trendline on my gold charts that would look like this:


Looking at it, it looks so natural that I'm embarrassed I didn't detect it before. Gold didn't break to new highs today, but the rise does look strong and there's no basis at this point to rule out the "rally to new highs" scenario. It won't be confirmed unless gold on this chart goes above 1008, so we'll have to continue keeping a close eye on it.