Is It Time To Buy The US Dollar?

• A few words on sentiment
• The long-term technical remains bearish but…
• Short-term is almost bullish
• What about the euro?
• Conclusion

A few words on sentiment

The Dollar Index has been in a virtual free fall since the end of last year. No market goes down forever, because traders exhaust their selling as crowd psychology moves to an extreme in sentiment. We may well have reached that point right now, because some surveys are at bearish extremes for the Dollar and bullish ones for the Euro. The same can be said for commitment of traders reports where hedgers are currently reflecting similar sentiment. My belief has always been that the level of sentiment is not as important as its trend. Level comes into the calculation as a guide to when the elastic is getting fully stretched, but until it turns, the prevailing trend continues. The best signal that those bearish bets are being unwound usually comes from a reversal in the price itself. It’s amazing how rising prices attract bulls and falling ones, bears. Right now, sentiment appears to have reached an extreme, so the task at hand is to figure out what would be required to signal a reversal in trend that has the potential to snap that psychological elastic in a bullish direction. First, though let’s take a look at the long-term technical position.

The long-term technical remains bearish but…

Chart 1 compares the Dollar Index to its long-term KST. It’s difficult not to come to the conclusion that the Index is in a primary bear market. After all, it has violated its bull market trend line and crossed decisively below its 12-month MA. Moreover, the Index itself is declining, and the long-term KST is trading below its 9-month MA. The one saving grace lies in the fact that the KST is right at its equilibrium line. That means that a spirited short-term rally may have enough power to reverseits direction to an upward trajectory, as was the case at points A and B. I am not saying this is going to happen, but what is relevant, is that being complacently bearish at a time when virtually everyone else is, could be a dangerous assumption.

Chart 1

Short-term is almost bullish

Chart 2 shows us that the short-term KST is now positive and has also managed to rally above its 2017 down trend line. That adds to the power of the latest buy signal. The intermediate series is still bearish, but has reached a moderately oversold condition. If the implied rally from the positive near-term momentum comes to fruition that will mean that the intermediate series will reverse to the upside as well. The green arrows indicate that such action has had a positive effect on the Index since 2013. The really big event would develop if the Index moves above the red resistance trend line, since that would indicate that the recent drop below it was a whipsaw or false signal of weakness. In rallying above that red line, the Index would also surpass the dashed green down trend line and that would represent a powerful confirmation that the September break was false. Whipsaws, because they catch traders on the wrong side of the railroad track, are often followed by above average price moves. In this case that could well turn out initially to be a test of the 65-week EMA at just above 96.

Chart 2

Chart 3 shows that my Dollar Diffusion indicator has just begun to reverse from an oversold reading. This suggests that the dollar has started to reverse against some currencies. The solid green arrows indicate that previous oversold reversals have typically been followed by an advance. The two dashed ones remind us that this technique occasionally fails.

Chart 3

Chart 4 shows the same Dollar Diffusion indicator, but zeros in on the immediate past, where the reversal in the diffusion indicator is easier to spot. Note that the daily close down trend line for the Dollar Index is currently around 93. A move that can hold above that level would, given the very constructive current technical setup, be enough to signal a rally. Until then all bullish bets are off.

Chart 4

The Euro has a 57% weighting in the Dollar Index, so the currency closely mirrors the Index itself. However, an alternative is to follow the Wisdom Tree Bloomberg US Dollar Bullish Fund (USDU), which is more broadly based. This security is also in a sharp downtrend, but note that the KST, in the lower window, is very close to its 2017 down trend line. A decisive break above the previous closing high at $25.55, would suggest that a short-term reversal was in the cards. That’s because such action would also succeed in pushing the price above the green down trend line.

Chart 5

What about the Euro?

On a short-term basis, the Euro experienced a key reversal in late August, but a subsequent rally was unable to cancel that pattern by moving to decisive new highs. By the same token, the key reversal has not yet been confirmed with a break below the red up trend line, which is currently around 118.5. Bottom line, is that we are in limbo until the currency either registers new highs or breaks below the trend line. The slightly bearish KST suggests that the odds narrowly favor a downside break.

Chart 6

The short-term Euro setup is not that dissimilar to that for the Australian dollar, which is featured in Chart 7, except that the daily KST is very slightly bullish. In this instance though, the false break above the green trend line on September 8, signified by the key reversal pattern, is a stronger influence. That suggests to me that the Aussie is short-term vulnerable from here.

Chart 7

Pound looks stronger

Chart 8 indicates that joint trend line breaks for the British Pound and its Special K have been very useful in calling recent turns in both directions. Recently, both series reversed to the upside again, which suggests that the currency is headed higher, regardless of the general fortunes of the dollar.

Chart 8

Conclusion

The Dollar is in a primary bear market, but could be close to an inflexion point. Nevertheless, it is important to wait untilsome of the benchmarks cited above, have been bettered.

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.