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If you spot a dreaded wedge, head for the hills


BILL CARRIGAN

A few decades ago, pattern recognition was an important component of the art of technical analysis. Technicians drew their charts by hand and applied only basic technical indicators, such as a moving average, because of the lengthy math calculations. These limitations also restricted most technicians to the study of about 30 daily charts.

The introduction of the PC in the early 1980s quickly ushered in today's modern approach to technical analysis. Technicians now use computers to draw the charts and to calculate all of those fancy technical indicators. A few mouse clicks can now produce daily and weekly charts with a dozen indicators — in colour, no less.

The old-fashioned tools like trend lines and price patterns have been replaced by fan lines and exponential moving averages. Computers now make it easy to grind out hundreds of charts.

Many good technical analysts that I know still rely on the older method of trend lines and price patterns because these tools deliver fewer "false" signals.

Our chart shows the weekly closes of the U.S. dollar index, sometimes referred to as the Morgan dollar. The index price is usually posted in the futures section of the business dailies.

I have outlined the large wedge formation with two rising trend lines. Note how the two lines point upward with the lower line at a sharper angle. It is the series of higher lows and muted higher highs that create the bearish rising wedge. Note also the size — huge, and almost two years in the making.

I know of no other pattern or indicator that can be as deadly as the rising wedge formation. It is truly the "death star" of the technical indicators.

I bail out of stocks and indices the moment I spot a rising wedge under construction.

In the case of our U.S. dollar wedge, the collapse from the peak in early 2002 was quite predictable. Do you remember when the gold stocks began to advance in late 2001?

Now for the other job of the technical analyst. Once we have made a discovery — i.e., a top in the U.S. dollar — we then must provide a remedy to our followers. A technical prediction is pointless if we only intend to be spectators.

Here is the remedy for a probable long-term bear in the U.S. dollar: Buy gold or gold stocks. Make sure there is a gold component in your portfolio. You can do this by acquiring an exchange-traded fund or ETF, or you can buy a basket of mid-size gold producers.

The appropriate ETF is the TSX-listed iGold Fund (symbol XGD).

Buy the shares of commodity sensitive companies. A falling U.S. dollar will boost world commodity prices. Look into the ownership of the components of the S&P/TSX Materials Index.

This info is available on the Internet at http://ca.finance.yahoo.com/m6, or visit the poky and complicated TSX Web site.

Unfortunately, there is no Canadian ETF available for this important sector.

Own the shares of companies that will benefit from a falling dollar. The large U.S. exporters of capital equipment and info technology will do well during the early stages of a falling dollar. The Dow is loaded with these corporations.

Avoid the shares of companies that export to the U.S. and avoid the shares of U.S. importers.

Avoid U.S. dollar IOUs, namely, long-term U.S. treasury bonds.

Consider investing in commodity sensitive world markets. The two obvious names are Canada and Australia.

Some homework is required here but, then again, I never promised you a rose garden.


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Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sunday. He can be reached at http://www.gettingtechnical.com on the Internet.