Beneficiaries Of A Rising US Dollar Are Beginning To Look Tired

• The RS between US equities and the rest of the world could be about to break against the US.
• The GLD breaks above its intermediate down trendline.
• Silver experiences a false move to the downside, thereby leaving it free to move higher.

The Dollar and Related Markets. Has the US Dollar started a correction?

The Dollar Index remains well above its 12-month MA and long-term smoothed momentum is also positive. This places the Index in the primary trend bullish camp. However, we have seen some hesitation in its upward progress in recent days and volatility has also increased. This suggests that the dollar may be in the early phase of a correction under the overall context of a bull market. I think it’s always dangerous to try and call a counter-cyclical trend. However,  several dollar influenced markets as well as some intermarket relationships and their momentum indicators have begun to stall. That suggests that the dollar’s rise may well be interrupted in the weeks ahead.

To set the background, the dollar ($USD) broke out from a huge base at the end of last summer and took several dollar dependent relationships with it. These are shown in Chart 1. First, the ratio between the US stock market and the rest of the world in the form of the S&P/ MSCI Europe Australia Far East ETF ratio, (SPY/EFA), is plotted in the second window. This relationship makes it quite clear that one of the effects of a rising dollar is superior relative strength for US equities relative to the rest of the world. We see the same thing in the third panel, but in this case it’s US bonds (Barclays 20-year Trust, TLT) versus the Barclays International Treasury  Ex US Bond ETF (BWX), the TLT/BWX ratio. Finally, a rising dollar offers a strong headwind for commodity prices, which can be appreciated from the bottom window featuring the DB Commodity ETF (DBC). This series has been falling sharply during the course of the last few months. It shows up here as a rising price because I have inverted the price so that it moves in a similar direction to the other series in the chart.

In recent days all these markets have been hesitating which, given their connection to the dollar, suggests it too may be in the process of stalling.

Chart 1

Chart 2 shows the same relationships, but this time from a shorter-term aspect. Note how the Dollar Index ($USD) made a new high recently whilst the SPY/EFA and TLT/BWX relationships did not. The  DBC “confirmed” the dollar in a marginal way, but the overall impression one gets is that some chinks are starting to appear in the dollar armor. The downside leader appears to be the equity relationship (SPY:EFA), which, as Chart 2 shows, could be in the final phase of completing a head and shoulders top. All three are currently above nicely definable up trendlines, so if a couple of them break to the downside that would support the case for a correction in the dollar. The trendline for the UUP itself is currently just above $25.60. You can follow the progress of these indicators by clicking on this or any other chart in the article and saving it in a chart list.

Chart 2

Chart 3 compares the UUP to its short-term KST. The arrows show that downside reversals have flagged all of the corrections that have taken place in the current dollar bull market. Most of these price movements have been flat or almost non-existent, which demonstrates the difficulty of calling a correction in a bull market. In the last day the KST has started to hook down again and this, combined with the negative divergences featured in Chart 2, suggest that if another correction is about to get underway this may be as good a time as any for expecting it.

Chart 3

Chart 4 compares the dollar ($USD) to a diffusion indicator (!PRDIFCUR) measuring a basket of cross dollar relationships in a positive trend. As you can see it reversed to the downside some time ago and has been declining ever since. However, a couple of days ago it began to edge up again, thereby offering the hope of some additional dollar strength. This indicator, like the SPY/EFA relationship is clearly at a critical juncture.

Chart 4

Gold and Silver

Most of the time gold and the dollar move inversely, though there are a number of exceptions to this rule, so there are no guarantees on this one. If a dollar correction does pan out to be a reality, we would also expect gold’s technical position to be constructive. Chart 5 tells us that the daily KST for the Gold Trust ETF, the GLD, is very oversold and starting to flatten as a possible prelude to an actual reversal. That seems likely because the price has just violated its intermediate down trendline and will not run into any serious resistance until $115. Nevertheless it is very important to make sure that the price holds above this line; otherwise the whole move will be suspect.

Chart 5

Chart 6 shows the GLD situation from a longer-term perspective, where we can see that the price has been caught in a declining channel. Since both the intermediate and long-term KSTs are in a bullish mode it seems likely that an attempt on the upper trendline of the channel is now underway. That line is currently around $123.50. A break above it that can hold would greatly enhance the case for a bullish primary trend.

Chart 6

Silver Tracking ETF (SLV) looks to be a better bet because its KST is right at its MA and given the break on the down trendline for the price itself, seems almost certain to go bullish. You can also see that the break below the red trendline turned out to be a false one. Since whipsaw moves such as this are often followed by above average price moves I would not be surprised to see some near-term fireworks on the upside.

Chart 7

Looking at the intermediate and long-term KST in Chart 8 the technical position is indeed encouraging as both series are in a subdued but rising trend. The next test for the Silver ETF, the SLV, will come at the green down trendline, which is currently around $16.80.

Chart 8

Finally, Chart 9 shows that the ratio between silver and gold has just completed a base in favor of silver. Note that the short- and intermediate KSTs are bullish, only the long-term series remains below its EMA. That state of affairs seems likely to change given Friday’s upside breakout in the ratio itself. We cannot say that an improving silver/gold ratio is always bullish for gold but if I was bullish on gold I would feel much more comfortable if it was being out performed by silver. That’s because silver is the more speculative of the two and therefore underpins an improving trend of confidence.

Chart 9

Good luck and good charting,
Martin Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group or its affiliates.