Dollar Breaks To New Highs As Several Stock Averages Drop Below Their 200-Day Moving Averages

• Dollar Diffusion Gives a Buy Signal
• Differential Interest Rates Turn Bullish for the Dollar
• $NYA and $COMPQ Drop Below Their 200-Day MAs

One would think that a record trade deficit would be bearish for the dollar. However, the market does not agree, as the Invesco Bullish Dollar ETF (UUP) just touched a new bull market high. My research has shown that, historically, there is very little short-term correlation with the dollar’s progress and “logical” fundamental indicators, such as trade and current account balances, differential money supplies, purchasing power parity and the like. What it’s really all about is psychology, which means following the charts. There may be some holy currency grail out there, but I have yet to find it or read about it from anyone who has that theoretical magic key. From a contrarian point of view, a rising Dollar in the face of bad apparent news is a favorable factor, suggesting the Dollar has much further to run on the upside.

Dollar Diffusion Gives a Buy Signal

Chart 1, comparing the UUP to my Dollar Diffusion indicator, agrees. This chart monitors a basket of cross-Dollar relationships that are in a bullish mode relative to an intermediate MA timespan. The arrows show that reversals in the indicator, regardless of direction, have usually been followed by a worthwhile move in price. The two dashed arrows, though, demonstrate that this approach is not perfect, as both were associated with failed signals. With this week’s Dollar strength, another potential upside reversal is developing. I think this one is going to “work,” as the price itself experienced two false breakouts in February, one on the upside and the other on the downside, and has now recovered to a post-February breakout high. It seems likely that February ‘s indecision has been resolved in favor of the bulls.

Chart 1

Chart 2 puts the current attempt at an upside breakout in greater perspective. Multiple attempts at surpassing the horizontal green trend line at around $25 have been launched in the last 4 years. Some succeeded temporarily, but on no occasion was the price able to remain above the line for an extended period. Today, another attempt is being made. I think this one is more likely to succeed. Previous attempts ran into resistance in the form of the green downtrend line constructed against the Special K (SPK) indicator. This time, however, the SPK is above that line and moving away from it.

Chart 2

Differential Interest Rates Turn Bullish for the Dollar

Chart 3 compares the Dollar Index itself to a ratio between the iShares Core Aggregate Bond ETF (AGG) and the SPDR International Treasury Bond ETF (BWX). The ratio represents an attempt at monitoring swings in differential interest rates, which do help forecast currency swings. A comparison of movements between the ratio and the Dollar Index reveals a close correlation between them. Right now, the ratio is breaking above a major resistance trend line, as it begins to factor in the ECB’s surprise move towards easing. This breakout is happening at the same time that its short- and long-term KSTs are in a bullish mode, thereby adding to its credibility. Given the close relationship between the ratio and the Index, it seems likely that the latter will move higher as well.

Chart 3

$NYA and $COMPQ Drop Below Their 200-Day MAs

Thursday’s price action saw the NYA and NASDAQ Composite drop below their 200-day moving averages. This is shown in Charts 4 and 5, respectively. Such crossovers occur far more often than many of us would like and are by no means 100% accurate. However, when the price fails to hold above it following a lengthy period of sub 200-day MA activity, it’s often a sign of exhaustion. Earlier in the week, I wrote that the market looked vulnerable, but that the uptrend was too steep to use any trend lines to confirm that vulnerability. I suggested using a negative 200-day crossover instead. It looks like we now have that signal.

Chart 4

Chart 5

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 ofPring Turner Capital Groupof Walnut Creek or its affiliates.