Is The Dollar Really In A Bear Market?

• The long-term setting
• Short-term considerations
• Some individual currencies are vulnerable over the short-term
• Conclusion

The long-term setting

A few weeks ago I pointed out that the Dollar Index ($USD) had violated its bull market trendline, as well as the 65-week EMA and 12-month MA, two key long-term smoothings. That type of evidence, in conjunction with a declining long-term KST usually denotes that the security in question is in a primary bear market. We can see some evidence for this in Chart 1, where the pink shadings represent periods when the Index is below its 12-month MA along with the KST.

Chart 1

Chart 2 compares the US Dollar Index ($USD) Index with its 65-week EMA. It’s bearishly positioned as well.

Chart 2

We tend to think of things either going up or down, ignoring the possibility of a trading range. If we ignore the MA’s and focus on the price action itself, we can see from Chart 3, that the US Dollar Index ($USD) has really been in a big trading range since early 2015, which means it may not be a bear market at all. Unfortunately, there is no way of finding out until the Index breaks in one direction or the other. It’s an important distinction, not only for the dollar itself, but for other markets that are influenced by changes in the currency’s direction. When the dollar rises, for instance, there is a strong tendency for commodities and gold to decline, for US equities and bonds to rise against the rest of the world and so forth. Bearing that in mind, let’s take a look at some more short-term oriented charts.

Chart 3

Short-term considerations

In this respect, Chart 4 tells us that the near-term picture is far more promising, as the short-term KST has not only just gone bullish, but has broken its 2016-17 down trendline. That does not guarantee a rally of course, especially if the Index really is in a bear market. However, since it is not that far from its long-term MA’s, the question naturally arises as to whether the anticipated short-term rally will push the currency back above these important benchmarks.

Chart 4

It’s early days yet as my diffusion indicator (!PRDIFCUR) monitoring a basket of cross dollar relationships is still declining. However, you can follow it by just clicking on the chart and saving it in a chart list.

Chart 5

I think there is a good chance it may turn, because Tuesday’s early session action, shown in Chart 6, indicates that the Dollar Index ETF, the UUP, has started to emerge from a small base.

Chart 6

Some individual currencies are vulnerable over the short-term

Chart 7, features the Euro ($XEU), where we can see that the short-term KST has already gone bearish. This seems to confirm last week’s exhaustion bar, in which the price rallied sharply during the session but closed near both the opening and low, well under the green breakout trendline. It could be that the euro is in the process of tracing out a small top as indicated in the Chart. Completion of that potential top would require  the price to drop decisively below the red trendline, say to 111. Note also the negative break in the dashed red up trendline as well as the bearish two bar consolidation pattern flagged by the pink ellipse. Since the euro has a 57% weighting in the Dollar Index, that would be an important signal.

Chart 7

We see similar action for the Swiss Franc ($XSF), where the currency is also threatening to complete a small top. Here again we see a declining short-term KST, which supports the idea of a near-term sell-off.

Chart 8

One currency that needs to be watched closely is the Japanese Yen ($XJY), as it may be in the process of completing an upward sloping head and shoulders consolidation pattern. Some weight is given to this possibility because the KST has just started to turn sown. The actual confirmation would come with a break by the currency below the red up trendline, say to 89.

Chart 9

The Canadian Dollar ($CDW) may well be forming a base, but it needs to prove that with a decisive daily close  break above 76c. In the meantime, the RSI is retreating from an overbought condition, which the red arrows show has usually been a bearish sign.

Chart 10

Conclusion

At this point we should probably stick with the Dollar Index bear market scenario. However, it remains only about 1% below the 65-week EMA and other key MA benchmarks. That means that a short-term rally could have the potential to reverse these negative signs.  We are already getting implications that a near-term rally is underway, which means that dollar bears should not be complacent and dollar bulls encouraged.

Finally, Chart 11 features my Dollar Sympathy Composite (DSC), which is calculated from several relationships that swing in sympathy with the dollar. Included in its construction are relationships such as the inverted gold price, US stocks versus the rest of the world and so forth. Individually, these relationships have a tendency to move with the dollar, but each has its temporary failings. Combining them into one series appears to smooth out some of these differences. Right now, the DSC is very close to an upside breakout and its short-term KST has gone positive. If this series had started to diverge from the Index in a negative way, I would be more concerned about the fate of the Dollar. However, and we will have to watch this one closely, it seems poised to move higher. In that event, I would expect nothing less of the Dollar Index itself!

Chart 11

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.