If US defaults, it would have lasting effects

The US debt crisis has developed so slowly that it hardly seems fair to call it a crisis. A crisis often develops quickly, catching participants by surprise. The US debt crisis has moved in slow motion and markets have been given plenty of time to adjust to the by now almost inevitable downgrade of US debt. The detail of the resolution remains unknown and the core problem of long term profligate spending remains unresolved.

The details of the agreement will drive short-term market reactions. The longer-term market reactions have already been incorporated into market behavior. They appear as patterns of support and patterns of continuation. They are seen in the US Dollar Index chart, the behavior of the price of gold and the behavior of the Dow Jones index. These patterns contain no surprises so investors can position themselves for profit or protection.

The US Dollar Index chart remains in a primary downward trend. Strong support/resistance is near $0.745. A negative reaction will test the longer-term support near $0.715. A sustained breakout above $0.765 is required before the downward trend is proved to be broken. The chart pattern suggests continued weakness.