Is the Multi-Month Dollar Index Trading Range About to be Resolved?
Last June, I wrote an articlewhose title was more or less the same as this one. At the time, the Index was bumping up against the top of a major trading range, and it looked very much as if it was about to experience an upside breakout. My conclusion was "As always, we should let the market decide, but I would say that, given the favorable long-term trends, the odds of an upside breakout are higher than a downside one." Those odds may have been higher, but the market chose a different path, and the Dollar Index has now sunk to the lower end of that range, thereby posing the same question but with a possibly different outcome.
The previous article appeared by the blue arrow in Chart 1, when the Index was in the process of challenging the green resistance trendline. Using the benefit of hindsight, we can also appreciate why it's a good idea to wait for a breakout to actually materialize before taking action, as the dollar's trajectory quickly reversed to the downside. Now the Index has reached important support at a time when the short-term KST is trading at a moderately oversold level. Consequently, it would not be unreasonable to expect some kind of a relief rally in the immediate future, even if a downside break does ultimately take place. Indeed, the declining intermediate and long-term series remind us that the more dominant cycles they reflect are likely to pressure prices lower.
So too is the Special K (SPK) for the Dollar Index. This indicator, which you can read about here, combines all three KSTs into a composite momentum series. One of the ways it can be applied is to observe signal line crossovers, which have been identified in Chart 2 by the red and green arrows. The SPK tried to cross above the signal line and green down trendline last June, but was unsuccessful. If the Index can rally from support in the immediate future, there is a chance it could be successful in a bid to clear the signal and down trend line. However, the odds do not favor such a move, as the SPK has just touched a post 2022 low. They say that where the SPK goes, the price usually follows; if that rule works out, it would imply a resolution of the trading range on the downside.
Chart 3 plots monthly data for a PPO incorporating the 6- and 15-month parameters. It goes bullish when it crosses above zero. The green shadings approximate such periods. Since this is a month-based chart, end-of-month data is required for an official plot. However, with three trading days left until the August close, it is unclear whether this marginal sell signal will stay in force. It also underscores a very finely balanced technical position.
Chart 4 approaches the primary trend situation from a different angle. The pink-shaded areas flag periods when both the long-term KST and the Index itself are below their respective MAs. This is also a monthly chart, but its bearish status is on much firmer ground, since the KST is in a more established downtrend than the PPO and the Index itself is well below its 12-month MA.
Finally, Chart 5 displays four key currencies: the Canadian dollar, British pound, Euro, and Japanese yen. Each has violated a key down trendline, suggesting that, if the Dollar Index itself breaks down, it will do so on a very broad basis. Once again, we need to let the market decide whether it wants to break in a negative way. However, this time the odds have shifted to the downside, and several primary trend indicators are in play for a bear market signal.
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.
