Is it Time for the Dollar Bull Market to Resume?

• Dollar Index ETF experiences a 38% Fibonacci correction and bounces.
• Key dollar relationships either at or just above major support.
• One way or another individual major currencies look vulnerable.

The Dollar Index ($USD) has been correcting for the last 9 weeks causing some observers to question the legitimacy of the primary bull market. So far though, there has been very little in the way of technical evidence to confirm a reversal in the basic trend. Could that mean that the current oversold short-term condition will trigger a rally to new highs?

Chart 1, for instance, shows that the Dollar Index ($USD) is still above its 12-month MA and continues to experience a positive long-term KST. Moreover, it is very unusual to see a market reverse on a dime because reversals are typically characterized by some ranging action as buyers and sellers battle it out for a while. Another thing I would look for would be the establishment of a series of declining short or intermediate peaks and troughs. All of this may well come to pass and we will later look back at March as being the peak. However, with the evidence we have at this point in time the bull case continues to rest on solid ground. If that assumption is correct, what signs can we look for to suggest that the downside part of the correction is over? I say “downside” because it is still possible for the Index to extend the corrective process through some ranging action prior to resuming its uptrend, compared to an immediate move to new highs.

Chart 1

Bearing that in mind, let’s take a look at some key relationships that move in sympathy with dollar trends. They are featured in Charts 2 and 3. Chart 2 represents the longer-term perspective, where it can be appreciated that the correlations between these series and the dollar are far from perfect but do indicate an overall common thread. As you can see each is at support. For example the Dollar Index ($USD) itself broke above resistance in the form of the green trend line and has recently bounced off the extended line. This offers a great technical example of the principle that a trend line reverses its support/resistance role after it has been violated. The line in Chart 2 was formerly resistance. Now it is a support zone. The ratio between SPY and EFA has not yet reached its support trendline but does not have far to go. We also see the ratio of U.S. to international bonds (TLT/BWX) in the third and the inverted DB Commodity ETF (DBC) in the bottom window have both dropped to support at their extended trendlines.

Chart 2

Chart 3 features the same series but using more recent data. The red vertical line represents the first sign of dollar trouble as the SPY/EFA ratio was the first to peak. Gradually the other series topped out and each one experienced a correction. Ironically this ratio was the first to show signs of strength as it broke above the dashed green down trendline flagged by the green vertical line. The remaining series have so far failed to violate their down trendline, though the inverted DB Commodity ETF would do so given any additional strength whatsoever.

Chart 3

Chart 4 delves further into the idea of support since prices often turn at Fibonacci retracement levels. In this respect the advance that took place between mid-2014 and early 2015 represents 100% of the move whereas the upper horizontal line flags a 38% retracement of that advance. That’s exactly where prices fell a few days ago. Would I bet the mortgage that that was the final low based on this one indicator? I think not. However, it does provide one more piece of evidence that the downward part of the correction could be over.

Chart 4

Chart 5 compares the Dollar Index ETF, the UUP, to a smoothed RSI. Generally speaking a market is not very sensitive to an oversold reading in a bear market or an overbought reading in a bull market. You can see this from the generally failed signals in the two ellipses. However, when we get a contra trend overstretched signal, such as this week’s buy indication, this kind of action typically represents a great opportunity. Consequently, if it is assumed that the dollar remains in a bull market chances are that prices will move higher from here. By the same token, if this recent buy signals fails to deliver a decent rally it will offer one piece of evidence that the tide has turned and that the Index is in a primary bear market.

One thing that makes me think that we will see some more ranging action prior to new dollar highs lies in the fact that the (solid red) bull market trendline was violated a couple of weeks ago. It’s a pretty steep one, so it’s not likely to result in an actual primary trend reversal. A more likely scenario is that once prices have had a chance to digest recent gains they will probably rise again, but at a slower pace of ascent.

Chart 5

What follows is a brief overview of several major currencies. Most, as you will see from the charts, have started to break down, which suggests that the dollar itself will continue to advance on a fairly broad basis.

The Euro ($XEU), which has a 57% weighting in the Dollar Index, recently experienced a false upside break, which is typical bear market action. It has now also violated its 2015 (dashed) up trendline and experienced a KST sell signal from a pretty overstretched level. That suggests to me that that the currency is headed lower.

Chart 6

It’s nail biting time in the Japanese Yen ($XJY) pits as the Japanese Yen sold down to the all-important horizontal red trendline on Wednesday. With the KST having now turned to the downside I won’t say it’s a no brainer because that could come back to haunt me. However, I can say that the odds of an ultimate break to the downside are quite high.

Chart 7

The Canadian Dollar ($CDW) remains in an uptrend but that looks questionable due to the bearish short-term KST. However, the near-term technical position does not turn bearish unless the price drops below the two trendlines to say 80.5c.

Chart 8

The Aussie Dollar ($AUDUSD) is also showing some signs of short-term vulnerability as it has violated the up trendline and experienced a KST sell signal.

Chart 9

In the case of the British Pound ($GDPUSD) we see the price well below its 12-month MA and the KST declining but not overstretched. Note that the recent rally brought the price back to the extended dashed trend line, a perfect place for anticipating the termination of a bear market rally.

Chart 10

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.