Green Shoots Are Starting To Appear For The Dollar

• Special K offers a trend reversal signal
• Euro looks toppy
• Gold could be vulnerable
• Watch those commodities

Special K offers a trend reversal signal

The Dollar Index ETF, the UUP, remains below its long-term moving averages and most long-term smoothed momentum, such as the KST also continues to drop. That suggests that the bear market is alive and well. However, there is one indicator that has started to turn in a positive way, not only for this euro dominated index, but for the more broadly based Wisdom Tree US Dollar Bullish Fund (USDU). That’s the Special K (SPK), which you can read about here. This indicator is calculated from the sum of short-intermediate and long-term momentum and peaks and troughs more or less simultaneously with primary trend tops and bottoms for the security it is monitoring, about 70% of the time. Those turning points are easy to spot with the benefit of hindsight, but become a little more tricky in real time. I have found that trendline breaks in the SPK, when confirmed by a similar break in the price itself, tend to offer pretty reliable early bird signals that the prevailing (primary and occasionally intermediate) trend has changed.  In an ideal world, I like to see a SPK trendline of at least 9-months duration penetrated in order to obtain a valid signal from the momentum part of the equation.

In this respect, Chart 1 shows three previous combinations for the USDU. Each were followed by a worthwhile trend reversal. Late October saw a fourth setup of this nature. In this case the SPK trendline does not quite meet the 9-month plus trendline duration requirement, but that for the price does. Note also, that the price experienced a whipsaw break below the horizontal red trendline. That break was identified when the price rallied back above it. However, it’s also important to see such action confirmed by additional positive price action. In this case the break above that 2017 green down trendline did the trick. One caveat, lies in the overstretched reading in the short-term KST in the bottom window.  That clearly argues for some corrective action. Perhaps, given the positive SPK technicals, a multi-week extension of the recent trading range.

Chart 1Chart 2 compares the two dollar ETF’s. Note how the UUP is right at its August peak, whereas the more broadly based USDU is above the green horizontal line marking the August high.  That’s a subtle hint that the dollar rally is taking place against a wider basket of currencies, the Dollar Index, being calculated with a 57% euro weighting.

Chart 2

Euro looks toppy

Chart 3 features the euro, where we can see the possibility that it may be in the process of forming a head and shoulders top. I emphasize the word “possibility” because that’s what it is until the neckline is actually violated with say, a decisive drop below the 116.50 area. The flat KST, in the lower window, indicates that the technical situation, as far as the short-term is concerned, is finely balanced. We can also see this through the narrowing trading range as bounded by the two converging trendline. Consequently, a break above the previous high and the green down trendline, say to 119.5 would resolve the balance in a positive way for the euro.

Chart 3

Gold could be vulnerable

Most, but certainly not all of the time, the dollar and gold move inversely. Consequently, if our bullish short-term scenario for the dollar works out we should be seeing some vulnerability in the precious metal area. The SPDR Gold Trust, the GLD, recently rallied up to resistance in the form of the green trendline in Chart 4. I don’t think the anemic breakout qualifies as a whipsaw. However, Monday’s action nevertheless, does look quite bearish. That’s because it encompasses Fridays trading range to qualify as an outside day. These one day patterns have an effect for between 5-10 sessions, so it will be interesting to see whether the tentative KST buy signal will hold. I would use the $124.50 and $119.50 levels as key juncture points since both would qualify as decisive trendline breaks on the up and downside.

Chart 4

Often gold shares will lead the price of the yellow metal at important market turns. In this respect, Chart 5 tells us that both the VanEck  Gold Share (GDX) and Junior Gold Share ETF’s (GDXJ) remain in an uptrend. However, both are currently resting on key up trendlines, leaving little margin for error. On the other hand, a bounce from here that takes them above the two horizontal green trendlines at $25 and $35 respectively, would be a positive development, suggesting a test of the early September highs.

Chart 5

Palladium came onto the radar screen earlier in the week, with its false break above its September high. The strong bearish outside day on Monday suggests that further profit taking is in order.

Chart 6

Watch those commodities

Both the Bloomberg and DB commodity ETF’s have experienced a blow-off or exhaustion move, as we can see from Charts 7 and 8. Chart 7 tells us that the price was unable to hold its breakout above either of the two trendlines. Right now, the KST is in a positive mode. However, since it is not that much above zero, a few sideways sessions, which is about the best one can expect from an exhaustion move, would be enough to reverse the recent uptrend.

Chart 7

In the case of the DB Commodity ETF we see a declining KST and another exhaustion breakout. In this instance confirmation would come from a break below the red up trendline, which is currently around $15.40.

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.