Is The Dollar Getting Ready To Make A Big Move?

• The Dollar Index -- primary trend
• The Dollar Index viewed from the short-term trend
• The euro
• The yen
• The Canadian dollar
• Emerging market currencies

Expectations were high for the US Dollar ($USD) following the election and indeed, the currency did rally for a while. However, the trend for most of 2017 has been a downward one in terms of the majority of cross rates, and this throws up the question of whether the bull market is still alive.  Let’s review the technical history of the last year or so and see if we can answer that question.

The Dollar Index-- primary trend

Chart 1 shows that the Dollar Index began its bull market in 2014, experienced a sharp rally and then proceeded to consolidate for a year. In late 2016 it broke to the upside and has since sold off. Given the perspective of this long-term chart, the pull-back looks like a normal retracement move, back to support in the form of its extended breakout trendline. Despite the recent setback, the Index remains above its 65-week, and most other long-term MA’s. It continues to reflect a series of rising intermediate peaks and troughs. The Index is also above its bull market trendline. In addition, that line is almost intersecting with the EMA, thereby reinforcing them as a major dynamic level of support. I call it “dynamic” because the actual support level is continually rising along with these indicators.

Chart 1

Chart 2 shows that the Dollar Index ($USD) is also above its 12-month MA. Once again the MA and the monthly bull market trendline are in the same vicinity at around 98. The most bearish aspect of the chart, is the declining KST in the middle panel. However, the Coppock indicator in the bottom window has reversed to the upside. The green arrows tell us that, when this has happened in the past, the less sensitive KST has always followed. Such action has not always led to a rally, as we can see from the two dashed green arrows. By and large though, a rising Coppock has been a technical plus. This preponderance of positive evidence suggests to me that the bull market is still alive. That view would change with a drop below the 12-month MA and up trendline with a month-end close below say, 97. Not only would that push most long-term trend measures into the negative camp, but it would also invalidate the 2016 breakout. Working on the assumption that the bull is still alive, now might be a good time for anticipating a rally. How so?

Chart 2

The Dollar Index viewed from the short-term trend

Chart 3 shows that the daily KST has reversed from a moderately oversold level and is now positive. That suggests that the potential 2017 reverse head and shoulders will be completed, with a break above the green trendline and blue 50-day MA. Were that to happen, I would expect to see new highs.

Chart 3

Chart 4 offers an alternative narrative, since the Index may be in the terminal phase of completing a slightly larger downward sloping head and shoulders top. A drop much below 99 would confirm that scenario. Note the currency diffusion indicator in the lower panel. It monitors a number of cross dollar relationships in a positive trend. It is still declining and is moderately oversold. If the more bullish scenario from Chart 3 takes place, with a daily close above 101.50 that would probably be sufficient to enable this diffusion indicator to reverse to the upside. In that respect, the green arrows show that in a bull market such action is usually followed by a rally of some kind.  In short, we have two benchmarks, one at 101.5 and the other at 99, both basis daily close.

Chart 4

The Euro

A key problem with the Dollar Index ($USD) is that one currency, the Euro, has a 57% weighting and that means that very often the Index is a mirror image of it. We can appreciate that from Chart 5, which shows the possibility of the same two head and shoulders seen for the Index. In this case the larger potential pattern is bullish and the smaller one bearish, the exact opposite of what we observe in the Index. Moreover, the KST for the Index is bullish and for the Euro bearish with a negative KST being substituted for the positive one for the Index.

Chart 5

The Japanese Yen

The Yen is also supporting the idea of a possible 2017 head and shoulders top, but in this case the KST is only marginally bearish, indicating that the technical situation is slightly more balanced. The critical point here is 87, since a drop below that level would complete the pattern, taking the currency below its 50-day MA and two January lows.

Chart 6

The Canadian Dollar

The Canadian dollar is very much influenced by the trend of commodity prices, as we can see from Chart 7, which compares its progress with that of the CRB Composite ($CRB). Right now, it looks as if the currency is close to breaking out from a downward sloping reverse head and shoulders. That would require a month-end close above 78c. It also looked as if the dollar was reversing in 1999, but as you can see the red up trendlines, for both it and the $CRB, were violated. Additional re-accumulation followed.

Chart 7

Charts 8 and 9 help us to follow the short-term picture. Chart 8 displays the $CRB trading between two converging lines. Decisive breakout points would be 196.5 and 186. Note that the KST is right at the equilibrium point. Although it is declining now, that means that it would not take much in the form of upside action to reverse that downward trajectory.

Chart 8

Chart 9 demonstrates how close the Canadian Dollar ($CDW) is to an upside breakout. Unfortunately, the KST is moderately overbought, but if this is truly a bull market for the currency that will not matter. To get an impression of the potential for counter-cyclical trends to fail, just look at the false KST buy signals contained in the pink rectangle during the previous bear market.

Chart 9

Emerging market currencies

One final currency observation comes from Chart 10, which compares the Wisdom Tree Emerging Markets Emerging Currency Strategy Fund (CEW) with that of the MSCI Emerging Market ETF, the EEM. As of Friday’s close, both series were on the edge of an upside breakout. Since these market segment is very much influenced by the fortune of commodities that’s an area well worth monitoring along with the dollar in the period directly ahead.

Chart 10

Good luck and good charting,
Martin J. 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 of Walnut Creek or its affiliates.