My last post was on how the USD uptrend still looked intact despite the
sharp pullback into Wednesday's close. That remaining the case though
was dependent on USD reversing back upwards on Thursday which most
definitely failed to happen. The USD rising channel is not yet broken,
but there is now every reason to think that this USD wave up since
December peaked at 82.24:

GBPUSD has broken up decisively on Thursday and EURUSD now looks poised
to do the same. They may yet turn back down, but that looks less likely
than a further move up.

In the context of the longer term, we are likely to have been watching
only the first wave (of 5 waves) of the third wave up since USD bottomed
at 70.7 in 2008. We should now see a significant retracement of the
wave up since December before the 3 of 3 starts and a much larger and
longer move up in USD begins. I have marked likely retracement targets
on the daily USD chart above. Here also is a look at the monthly USD
chart for the long term USD picture with what I think is the most likely
wave count:

If this USD wave up has finished, this is likely to have a very dramatic
effect on equities as well. I've said before that an ongoing strong
subwave up in USD was likely to at least cap equities into trading
sideways even if there was no corresponding equities retracement, and
equities have indeed been trading sideways for a couple of weeks now.

I was expecting that this would continue for another couple of weeks
while the balance of the USD wave up played out, and that we would then
see a powerful last wave up in equities while USD retraced. It now looks
likely that this is happening now rather than later, and if we are now
starting a period of USD retracement and consolidation that is likely to
last a few weeks, then during that time we should expect to see
equities surge ahead. On the SPX 60min chart you can see that the main
channel up since the low on Feb 5th is very much intact, and that we are
likely now to be starting the fifth and final subwave up within that
channel. I've marked the likely wave count on the chart and the fourth
wave seems to have formed an ascending triangle with a target in the
1200 area:

In the longer term the main rising channel since the bottom in March
2009 is also very much intact. I have also marked the likely support and
resistance levels on the daily chart:

On quite a few charts we are seeing major reversals and breakouts here.
FXI has broken up decisively from a broadening descending wedge, gold
and oil seem to be breaking upwards too. I'm also seeing this on a lot
of individual stock and ETF charts that I have been looking at over the
last couple of days.

How far could equities rise? Difficult to say of course. I've liked the
61.8% fib retracement at 1229 for a while now and think SPX is likely to
get there, though it may go further. I have a target of 18 on XLF from a
broken and resolving rectangle:

The nightmare chart for bears is the Vix chart of course. On the weekly
chart there is a year-old gently declining channel where the next target
is somewhere between 13 and 14 depending on the time taken to get
there. Could it really get that low? I wonder, but the level of
misplaced complacency reached over the last year is already astounding:

We are not so much climbing a wall of worry in this market as surfing an
ever expanding wave of complacency that government intervention can and
will cure all economic ills.

When the government's credit starts getting tight, and that is likely to
happen within a year of two at most and perhaps much sooner, then we'll
see how much of this subsidised optimism can survive in an market operating without the Bernanke Put.