Dollar Breakout Starts To Infect Other Markets

• Dollar Index breaks to the upside
• Dollar sympathy relationships
• The Aussie Dollar close to a mega signal for itself and commodities

Dollar Index breaks to the upside

Chart 1 shows that the Dollar Index falsely broke to the downside at the very beginning of the year. In the last couple of weeks it rallied above its 2018 trading range and now finds itself just shy of its 65-week EMA. When a suspect whipsaw takes place, it’s always nice to see some additional evidence that confirms such action. In this case that confirmation was provided by the violation of the green down trend line. Note that both the short-term and intermediate KSTs are now bullish, leaving just the long-term series in the bear camp in negative territory. It would be nice, from a bullish aspect, to round out the positive momentum to all three indicators, but it’s important to remember that this one usually lags anyway.

Chart 1

The Dollar Index is encumbered with a 57% weighting by the Euro. However, the Wisdom Tree US Dollar Bullish ETF, the USDU is a more broadly based series, and it looks to be a bit stronger. In this respect, Chart 2 tells us that the price has managed to rally above its bear market trend line and the 200-day MA. That 200-day MA crossover is a big deal, because previous ones have been pretty reliable. The thick green and red arrows show decisive crossovers that have taken place since the inception of the fund. Equally important, is the fact that the Special K(SPK) has managed to rally above its 2017-18 down trend line. Previous price/SPK joint violations have been flagged. Each has been followed by a worthwhile move. Incidentally, you can learn about the Special K here.

Chart 2

We cannot, at this point call the Dollar bear market as over, since the Index remains below its 12-month MA and long-term KST remains below its MA. However, my reading of the overall situation places the odds at 50/50 or better that it’s over. It’s the nature of technical analysis that the evidence for important trend reversals normally take time and we should not rush the process.

Dollar sympathy relationships

Even so, it’s worth asking the question, as to what markets and key relationships might be affected by an important change in its trend? Chart 3, for instance compares the Dollar Index to two relationships. These are first, the ratio between US equities ($SPX) and the rest of the world (VEU); second, US Bonds, in the form of the Barclays Aggregate Bond Fund, the AGG) and the rest of the world, as represented by the Barclays International Treasury Fund (BWX). These relationships certainly do not move tick by tick with the Dollar Index, but their broad swings do, as demonstrated by two previous joint trend line breaks. When all three series are moving in concert, and confirm what the Dollar itself is doing, we have a stronger sense that the change in the Dollar is not spurious. So far, only the Index itself has violated its green down trend line. With the equity market ratio getting pretty close. This failure to so far, confirm the Dollar breakout is one reason why we should be a little cautious in jumping on the primary bull trend bandwagon.

Chart 3

The Aussie Dollar close to a mega signal for itself and commodities

The Aussie Dollar tends to move in a similar direction to commodity prices. We can see that from Chart 4, where both series appear to rise and fall in concert, as it is often possible to see two joint trend line breaks. Equally important is the fact that KST dollar sell signals, flagged by the red arrows, almost invariably develop along with primary bear moves in the CRB Composite. One exception developed in 2004. Recently, the KST rolled over again. There is still time for it to back away, but any further weakness will result, not only in a KST sell signal, but a violation of that secular up trend line in the Aussie Dollar itself. It hasn’t happened yet, but if it does, given its relationship with commodity prices, they probably would be not that far behind.

Chart 4

Chart 5 compares the USDU with the copper price. Since copper also tends to move inversely with the currency, I have plotted it that way. The good Dr. has already violated its dashed green bear market trend line and now looks set to complete that potential base. The magic number lies just north of $3, which in the real world of course, means south of $3 for a downside breakout. It will be interesting to see if that happens because copper, as the chart shows, usually leads the dollar, not the other way around.

Chart 5

Chart 6 shows the close relationship between the Dollar and (inverted) gold prices. Gold has clearly violated its 2016-18 down trend line and now finds itself right at the top of its 2018 base. The big question, is whether (inverted) Gold follows the Dollar with an upside breakout of its own, or is the Dollar breakout a false positive, to be followed by a Dollar Index retreat into the February/April trading range.

Chart 6

The answer probably lies in Chart 7, where the weekly close of the Gold price (not inverted this time), in the form of the SPDR Gold Trust (GLD), is very close to a downside break below its red up trend line and 65-week EMA at $122.66. It has already dropped below its 2018 trading range and all three KSTs are rolling over to the downside. That suggests that a move to the downside is likely, and therefore likely to confirm that the recent bullish Dollar breakout is valid. However, the 65-week EMA and trend line remain intact for the GLD, and the KSTs are not so badly wounded that a quick reversal to the upside could not reverse their current status. I am not betting on that, but will definitely be keeping a close eye, in case it happens. Remember, markets are people in action, and people can and do change their minds. Bummer!

Chart 7

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.