Is The Breakout In The Dollar For Real?

• The primary trend
• The short-term picture
• The Dollar, Copper and Gold

The Dollar Index showed some green shoots at the end of the week that might lead to greater things. That’s important in its own right, but since the dollar often moves inversely with commodities and gold its direction has wider implications than purely the currency pits and bank trading rooms.

The primary trend

Chart 1 shows the long-term performance for the Dollar Index. By all accounts it is in a primary bear market. I come to that conclusion because the Index is below its 12-month MA and has completed a head and shoulders top. Moreover, the long-term KST is in a bearish mode. Having said that, it’s also apparent that the Index is resting above some key support in the form of the solid red bull market trend line. In addition, the KST has started to stabilize a bit. I am assuming the bear market is intact until the Index is able to rally back above its 12-month MA and dashed head and shoulders neckline, both of which are around 92.40. In the meantime, things are starting to look interesting.

Chart 1

The short-term picture

Chart 2, for instance shows the PowerShares Bullish Dollar Index Fund, the UUP, has just cleared the green resistance trend line. The main problem, as I see it, is that Friday’s breakout was accomplished with a gap and gaps are usually filled. That filling process would of course, mean that Friday’s breakout was false. A drop below the red trend line would be needed to confirm such negative action. Breakouts in a primary bear market are notoriously deceptive and Friday’s action could fit the bill.

Chart 2

An alternative Dollar possibility is shown in Chart 3, where the breakout line has been re-drawn to touch the February and early April peaks, as well as the lower end of January’s downside gap.  The rising MACD suggests that there is room for the price to go lower, close the gap and still break out in a positive fashion. In any event, this is a more conservative signal.

Chart 3

The Dollar Index comprises a 57% Euro weight and to some extent is a mirror image of it. We can see this from Chart 4. In this instance, it looks as though the Euro is in the process of forming a top. It would need to drop to 122 in order to do so decisively. The November-April up trend line has already been violated and the MACD has gone bearish, which means that the Euro is more likely to break down than not.

Chart 4

The Pound does not have that high a weighting in the Index, but Chart 5 shows that it recently experienced a false upside breakout and that that has now been confirmed with a penetration of the red up trend line. The price drop of the last four days has been somewhat steep, so we may experience a couple of sessions of consolidation. Even so, the decisive sell signal for the MACD suggests that currency is headed lower.

Chart 5

Chart 6 offers a more broadly based Dollar index in the form of the Wisdom Tree US Dollar Bullish Fund, the USDU. Not surprisingly, it too is in a primary bear market as it is below its 200-day MA and solid red and green resistance trend lines. What is interesting, is that it has tested its low on many occasions in the last couple of months. Each time that low has held. If the bear market were alive and well this failure to register new lows should not have happened. That observation offers up the possibility that the primary trend may be turning. On Friday, the price broke above the dashed green trend line, which strongly suggests that a test or the red and green converging trend lines may not be far off. This possibility is also being supported by my Dollar Diffusion indicator, which monitors a universe of cross dollar rates in a positive trend. It went bullish in March but is not yet overextended.

Chart 6

The Dollar, Copper and Gold

Chart 7 shows that there is a relationship between the Dollar and Dr. Copper. Since it is an inverse one, I have plotted the copper price inversely so that it moves up and down with the dollar. The arrows show that it is sometimes possible to identify a turning point in copper that is later experienced by the USDU. The leads and lags differ and sometimes there is no or little cooperation between the two series, but there can be no denying  the presence of some form of relationship. The inverse Copper series recently broke above the dashed green trend line, suggesting that that it is likely to move higher, in other words in the direction of lower copper prices. The key test of this theory would come in the event that the copper series can rally above the solid green horizontal trend line.

Chart 7

Finally, Chart 8 features the Gold Trust ETF, the GLD. Remember, Gold and the Dollar usually move in opposite directions. Recently the price broke above the green resistance trend line and was unable to hold above it. Whenever you see a price move through resistance on an intraday basis, but the open and close remain below it, that means that many buyers, who probably bought on the basis if the breakout, are trapped. That one-day price pattern is known as a “Pinocchio bar”, and its short-term bearish. I like to see false breaks confirmed by additional trend evidence. In this instance, that would be a break below the red up trend line. The stakes are even higher than the normal bearish implications of a simple Pinocchio. That’s because a penetration of the line would also strongly suggest that the potential inverse head and shoulders, flagged by the blue letters, had failed. Note also that the MACD reached its peak in January and was barely able to move much above zero at the Pinocchio high. That’s not a good sign, and suggests that the issue would be placed beyond a reasonable doubt with a drop below the right shoulder at $125.50.

Chart 8

In conclusion, the Dollar is very close to a bullish breakout, as featured in Chart 3. If that happens, a strong rally is likely to follow and there would be a good chance of a reversal in the primary downtrend. Since a strong Dollar is bearish for commodities and gold, softer prices in those areas could well materialize.

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.