Dollar Index Triggers Some Long-term Sell Signals

• Dollar Index experiences major trendline breaks and MA crossovers
• Dollar sympathy relationships confirm a weaker dollar
• Emerging currencies are emerging
• Some currencies remain in bear market against the dollar

Dollar Index experiences major trendline breaks and MA crossovers

This week, the US Dollar Index ($USD) violated several key benchmarks, leading to the conclusion that it is now in a primary bear market. Since the euro contains a 57% weighting, weakness in the Dollar Index is largely a reflection of strong European currencies, but more of that later.

Chart 1 shows that it has just violated its 65-week EMA and the 2014-2017 up trendline. Since both benchmarks are in the same vicinity they reinforce each other as a support zone. This means that the break is more significant, and less likely to be a false one. The declining trend of all three KSTs further underscores this point.

Chart 1

Chart 2 plots the Dollar Index (USD) together with its Special K (SPK) indicator, which you can read about here.  This is a daily chart, and once again we see the violation of a trendline and MA combination, but this time the MA has a 200-day time span. The Special K is also below its signal line and 2014-17 up trendline. The indicator itself has just registered a post 2015 new low. In most cases, where the SPK leads, the price it is monitoring usually follows.

Chart 2

The Wisdom Tree Bloomberg US Dollar Bullish Fund, the USDU, tracks a more broadly based dollar index and is offering a similar picture. Chart 3, shows that it has violated an up trendline and crossed below its 200-day MA. The SPK is also in an established downtrend. That means, that dollar weakness is not limited to European currencies, but is more broadly based. Concerning the Swiss Franc, you may also wish to check Greg Schnell’s article on its recent positive breakout against the dollar.

Chart 3

Markets are nothing more than a reflection of people in action. Since people can and do change their minds, it’s always a good idea to look over your shoulder and ask the question: What would it take to change the technical picture from bearish to bullish? For the USDU, this would happen with a decisive break above the green dashed trendline and 200-day MA, as that would confirm that the downside break was false. In the case of the Dollar Index itself, the answer would be a move above 100.

Dollar sympathy relationships confirm a weaker dollar

There are several relationships that tend to move in “sympathy’ with swings in the dollar. Two of them are featured in Chart 4. The first is the ratio between the S&P Composite and the Vanguard FTSE All World Ex US ETF ($SPX/VEU). The other, is the relationship between the iShares US Aggregate Bond Fund (AGG) and the Spider Barclays International Treasury (BWX), which is effectively the world bond market ex the US.  As you can see, the stock ratio has just severely violated  its 2011-2017 up trendline, as well as its 200-day MA. The bond relationship has been weak of late, but has not yet violated its 2014-2017 up trendline. Were these two relationships bucking the declining dollar trend that would be a clue that recent dollar weakness was false, but the fact, that the stock ratio in particular, has violated such an important trendline, suggests that further negative or rangebound Dollar Index activity is likely to follow.

Chart 4

Emerging currencies are emerging

Chart 5 shows that the Wisdom Tree Emerging Currency Strategy Fund (CEW) has just completed a reverse head and shoulders pattern. So too, has the Emerging Markets ETF (EEM). The latter though, may run into resistance at the green dashed trendline. Many emerging countries benefit from rising commodities and commodities tend to move inversely with the Dollar Index.

Chart 5

Some currencies remain in bear market against the dollar

Not all currencies are in a confirmed bull market against the dollar. The Japanese Yen, Chart 6, for instance, is right at its 65-week EMA and is experiencing a bearish short- and long-term KST. It may even be in the process of tracing out a bearish head and shoulders formation. A rally above the green trendline at 94 would go a long way to reversing this situation.

Chart 6

Chart 7 features the Canadian Dollar ($CDW). Its principal driving force can be seen from the top window, featuring the CRB Composite ($CRB). In fact, both series look as if they are in the process of completing a reverse head and shoulder formation. A month-end close above 77.5c would do it for the currency, especially as its long-term momentum in the bottom window, is already firmly bullish. However, until we see prices north of 77.5c, the Canadian Dollar remains in a confirmed bear market, as far as I am concerned.

Chart 7

Chart 8 shows a similar setup for the Aussie Dollar ($XAD), except we have a different take on the potential base for the commodity index, by using a horizontal trendline. In this instance a break above 77.5c for this currency would also do the trick.

Chart 8

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.