What Will It Take To Trigger A Bull Market In The Dollar?

• The indicated main trend is currently bearish
• What a more broadly-based Dollar index is saying
• Swiss Franc completes a small top
• Copper and the Dollar

The indicated main trend is currently bearish

The Dollar Index peaked in November 2016 and has so far bottomed in January of this year. If that proves to be the final trough, the Index will have experienced a 14-month bear market. All long-term measures continue to point south, so a bearish stance is still appropriate. Two indicators I am watching for a possible turn around are the 12-month MA and the long-term KST. The shaded areas in Chart 1 show when the Index has been trading above that average. It’s by no means a perfect indicator, as we can see from the three blue arrows, that reflect whipsaw signals. However, three whipsaws in 25-years or so of history is not bad going. The KST is still in a declining mode, though its current position, moderately below zero, indicates that the bear market is approaching a more mature phase. Until that 12-month MA is surpassed with a month-end plot decisively above its current 89.6 value it should be assumed that the main trend is negative.

Chart 1

Having said that, there are some encouraging factors that suggest a short-term rally is underway. The strength of that advance could have a bearing on whether the main trend reverses to the upside or not. Chart 2 indicates that the Index completed a downward sloping head and shoulders top at the turn of the year. Since the initial breakdown, it managed a small rally and then sold off to that initial January low. From there, I would have expected to see a decisive new low, after all this is a bear market, where the surprises, as the late great Richard Russell advised us, develop in the direction of the main trend. That did not happen, so we are left in the 2018 trading range limbo. If the Index now drops below those two minor lows that would re-confirm the bear market and invalidate the rest of this article. On the other hand, if it can rally from here and experience a decisive Friday close above 91, that would indicate that the head and shoulder breakdown was a false negative. Why? Because such action would result in a close above the red breakdown line, the green down trendline and the two minor 2018 peaks. Unfortunately, the mixed signals coming from the two momentum indicators are not giving us a clear-cut picture. The only thing we can say is that if the upside breakout it’s going to happen, it’s likely to take place fairly soon, because the short-term KST in the middle window has turned bullish.

Chart 2

What a more broadly based Dollar index is saying

The Dollar Index is constructed from a 57% weighting by the Euro. That really makes the Euro a mirror image of the Dollar. The Wisdom Tree US Dollar Bullish Fund, the USDU, is a more broadly-based series with less weight on the Euro and is shown in Chart 3. It too, broke down from a head and shoulders top, though this one was more horizontal in nature. The price also remains below this breakdown point. The key level here is the $26 level, since that is where the 200-day MA is currently residing. What adds to the bullish intrigue is the fact that my Dollar Diffusion indicator, in the lower window, has just started to reverse to the upside. That does not guarantee that the price will break the $26 level, but the odds are high that it will.

Chart 3

Chart 4 features the same ETF, this time with a Special K indicator. Note that the combinations of a trend line price break and a Special K break have been pretty reliable in signalling important trend reversals. Again this involves a penetration of the green bear market trend line, but the violation of an equivalent line for the Special K is certainly an encouraging factor.

Chart 4

Swiss Franc completes a small top

Chart 5 shows that the Swiss Franc has already started to break against the Dollar. The bar chart, in the upper window, has experienced a marginal breakdown. However, the more important daily closing line chart has broken down far more decisively.

Chart 5

Copper and the Dollar

Commodities tend to move inversely with the Dollar, so if the Dollar is to rally, it follows that some corroborating evidence from the commodity pits would boost the bullish Dollar scenario. In this respect, Chart 6 compares the USDU with the Copper price. Copper’s been plotted inversely to correspond with movements in the USDU. Two things are worthy of note. First, the arrows show that the inverted Copper price has a tendency to reverse ahead of the USDU. Second, having led the late February low in the Index, the price is now right at its 2016-167 down trend line. A breakout would be bullish for the Dollar and negative for Copper.

Chart 6

Finally, Charts 7 and 8 compare the DB Commodity ETN, the DBC, to a couple of net new high commodity indicators. The first, monitors a universe of commodities that are registering net new highs over a 50-day period. The vertical lines show when this oscillator reaches the red overbought line and reverses. Solid lines represent valid sell signals, dashed ones, false negatives.

Chart 7

Chart 8 displays the price action in the ellipse in greater detail. This time the oscillator is based on a 10-day look back period. The vertical lines show when the oscillator changes direction to the downside. As you can see, this indicator is currently on the verge of a sell signal. Equally important, is the fact that the price is very close to violating the 2017-18 red up trend line. If the Dollar breaks to the upside, we would expect a downside break in the DBC price, probably back to support in the form of the primary bullish up trend line in Chart 7.

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.