Weakening Dollar Unleashes Non-U.S. Markets, or Does It?

Last week, I wrote that the dollar and commodities were poised at inflection pointsand we should be on the lookout for an important move in both.

The U.S. Dollar Index ($USD) obliged with the completion of a head-and-shoulders top, as shown in chart 1. It's clearly overstretched on the downside and due for some kind of retracement bounce. However, the diffusion indicator in the lower window remains in an overbought condition and has only just triggered a sell signal. Further price erosion or a trading range at higher prices appears to be the most likely outcome over the intermediate term, defined as six weeks to nine months.

Commodities have not yet followed my script with a resolution of their rangebound price action in the opposite direction to the dollar. That's probably because the major commodity indexes are very overextended on a primary trend basis. That said, other relationships that usually swing in sympathy with the dollar do appear to be responding in an expected way.

Chart 2 compares $USD to the ratio of U.S. stocks and the iShares MSCI World Stock ETF (ACWI) and an aggregate measure of US versus international government bond prices. The chart clearly shows that both series move in tandem with the currency most of the time. The implication is that, if the dollar is likely to weaken, then so should the relative performance of U.S. equities and bonds. We need to be a bit careful since none of the series in chart 2 have yet violated their 65-week exponential moving averages (EMAs), so there is no confirmation yet that what we are seeing is anything more than an intermediate type of move.

That said, if you analyze a shorter-term chart (see chart 3), it's starting to throw up some subtle and serious problems from the point of view of U.S. relative action. First, the 2021–2022 up-trendline has been tentatively violated. Further weakness would not only result in a decisive penetration but a negative cross of the ratio's 52-week moving average (MA). The bearish mode of the short- and intermediate-term KSTs suggests that these important chart points will be breached. If so, that would confirm that the breakout above the small red dashed horizontal trendline was a whipsaw. One of the signs of a particularly weak market occurs when the price reaches a new high for the move and the short-term momentum is barely able to rally above its equilibrium point. A sharp drop does not follow every time, of course, but, when confirmed by a trendline break and reliable MA crossover, the odds are greatly enhanced.

International Country ETFs With Emerging Relative Strength Candidates

If the U.S. does underperform the world for a while, the question naturally arises as to which country ETFs are likely to participate. If we look at absolute prices, the answer is not much, as considerable technical damage has been done and that will take time to repair through extensive backing-and-filling and base-building activity. There are, however, some country ETFs that are close to an upside breakout.

Chart 4, for instance, features the WisdomTree Japan Hedged Equity Fund (DXJ). The price looks to be in the process of breaking out from an upward-sloping trading range. The relative strength trend is positive and has just broken out to the upside. Its principal problem is that the long-term KST for the price itself, in the second window, is overextended and declining slightly.

Chart 5 shows more recent price action in greater detail with a tentative upside breakout. It needs to experience a more decisive one, to be sure, but is something worth watching going forward.

Chart 6 features the iShares Mexico ETF (EWW). Its RS line, in the third window, has just experienced a decisive upside breakout, which is being supported by a positive KST for relative action. The price is right at resistance in the form of the 2015–222 horizontal trendline, but well above its 65-week EMA. As with the DXJ, the principal problem is that the long-term KST for the absolute price is overextended and below its 26-week EMA. That does not preclude higher prices but lessens the odds slightly.

Finally, the iShares MSCI Turkey Fund (TUR) has completed a base and is being supported by a long-term KST that has only recently crossed above its equilibrium point. Note that the RS line has managed to decisively surpass its 2013–

2022 down trendline, which is again supported by a positive relative KST. This, of course, is a dollar-based series. That's just as well because Turkey's October inflation rate clocked in at slightly over 85% and is being "fought" with a policy of lower interest rates, which have dropped from 15% last December to just over 10% in October. The technical position is suggesting that prices are headed higher; presumably, the market is seeing a silver lining out there!

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 Groupof Walnut Creek or its affiliates.