Evidence Of A Major Upside Dollar Breakout Is Growing

• Dollar Index experiences a false downside breakout
• Euro encounters a false upside breakout
• Yen completes a bearish multi-year continuation formation
• Swiss franc completes a broadening wedge

Back in mid-September, I wrote an article where I pointed out that the Dollar was on a knife edge. This view was based on a dilemma. First, the Dollar Index was trading below its 24-month MA, an indicator that has acted as a key pivotal point in the last 25 years or so. That meant that an upside crossover would likely be a very big deal. You can see that from Chart 1, where  the small arrows underscore its role as a dynamic level of support and resistance. That leaves the majority of the actual crossovers being followed by strong rallies and pervasive reactions.

Chart 1

Alternatively, it looked as though the Bullish Dollar ETF, the UUP (Chart 3) may have been in the process of completing a head and shoulders top. If so, such a downside break would have begun to challenge the primary bull market scenario. That scenario was justified by the fact that the Index was above the 12-month MA and the long-term KST was in the early stage of a rally, which is laid out in Chart 2

Chart 2

Dollar Index experiences a false downside breakout

What ultimately happened was that the Index broke to the downside. At the time, I noted that “[e]ven if we do see a downside resolution, it should not be forgotten that bull markets are notorious for triggering misleading downside signals. Consequently, if the Index is still in a primary uptrend, a whipsaw move would be perfectly consistent.” That false move is exactly what seems to have taken place, as we can see from Chart 3.

First, the UUP broke below the red trend line, and has since moved back above it. The price has also violated the green downtrend line, thereby invalidating the breakdown. That’s actually more bullish for the Dollar than if it had not experienced the false downside break in the first place. The reason is that a lot of traders have probably been trapped on the wrong side of the market and are now in a position where they have to unwind those positions. No wonder that false breakouts are usually followed by above-average moves in the opposite direction to the breakout. Since false breakdowns are a characteristic of a primary bull market, such action adds to the evidence that the Index is in a primary bull market.

Chart 3

That latest rally now puts the Index itself right at its 24-month MA. Unfortunately, “right at” is not a decisive break. Also, the 24-month MA calculation is made at the end of the month, whereas we are just at the beginning of October.

Chart 4 gives us another bullish benchmark to shoot for. That’s the neckline of a potential bullish inverse head and shoulders pattern for the Dollar. What are the odds of that being completed? One negative lies in the fact that the short-term KST, based on weekly data, still has some more corrective work before it can reverse to the upside. On the other hand, a review of the other side of the formula (i.e. cross Dollar rates) reveals potential weaknesses, which of course is bullish for the Dollar.

Chart 4

Euro encounters a false upside breakout

The Euro has a 57% weighting in the Dollar Index, as shown in Chart 5. It tried to form an inverse head and shoulders earlier in the year; however, the breakout failed. The price has also violated the red uptrend line, joining the potential head with the right shoulder, all of which has resulted in a KST sell signal and an invalidation of the price pattern.

Chart 5

Chart 6 raises the stakes somewhat, as the Euro very much looks as if it might be in the process of completing a large continuation downward sloping head and shoulders pattern. Completion would require a decisive break below the neckline, perhaps at 112 (basis Friday close). The two blue arrows reflect the downside measuring objective should the pattern be completed. Interestingly, that objective returns it to its bear market low.

Chart 6

Yen completes a bearish multi-year continuation formation

Chart 7 shows that the yen is leading the way with a completed breakdown from a similar formation. Note the support for this action by the two bearish KSTs.

Chart 7

Chart 8 takes a step backwards with a very long-term chart. This one shows that the Japanese currency is very close to completing an even larger potential pattern. This one began around the turn of the century and would require a decisive month-end close below 80 to complete. It hasn’t happened yet, of course, but serves to remind us of the potential for a Dollar rally should other factors fall into place.

Swiss franc completes a broadening wedge

The Swiss franc, shown in Chart 9, has been falling sharply in the last few sessions. It experienced a bearish key reversal eight-or-so days ago, which has led to the completion of a broadening wedge. Broadening wedges, like broadening formations with flat tops and bottoms, experience progressively widening rallies and reactions as the battle between buyers and sellers intensifies. When they are completed, the losing side is completely exhausted. That’s why a particularly sharp move often follows the breakout.

Chart 9

The outcome is particularly critical at the present time because Chart 10 tells us that the franc may be in the terminal phase of completing a huge top. There are several ways in which the neckline could be constructed. I have chosen two: the solid line takes it back to 2003, the dashed one to 2009. Either way, it is a very formidable pattern. Neither line, of course, has yet been decisively broken. A month-end close much under 100 would do the trick, especially as the long-term KST in the bottom window is in a bearish mode.

Note also that the franc has been in a bear trend since its peak in 2011 and the breakout above the dashed green trend line turned out to be a whipsaw signal. That false break would also be confirmed by a drop below the 100-level.

Chart 10

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.