The Dollar Index is Down, But Is It Out?

The Dollar Index has been selling off sharply in the last few weeks and has now reached critical support in the form of the lower part of its recent trading range. The big question is whether it will break below the range or extend it in any way.

Chart 1 shows that the short-term KST has started to turn up, which argues in favor of a near-term retracement move. That could be a complete reversal leading to an upside breakout, or a more tempered move returning the Index to its 65-week EMA. In order to answer the question, we need to step back and consider the larger picture.

In that respect, Chart 2 is not encouraging, as the shaded areas identify phases when the Index is above its 12-month MA and the Coppock Curve is rising. As you can see, these tend to be the most bullish periods. Now, both series are negative, leaving the chart in an unshaded state. This is not necessarily bearish, but does happen to be when the currency is at its most vulnerable.

The third chart reinforces the negative long-term aspects. In this instance, the pink shadings identify periods when the PPO, using the 6- and 15-month parameters, is below zero. These signals have caught most of the major declines that have taken place since the turn of the century. The recent sell signal does not therefore bode well for the Index being able to avoid a break below the 2022-2024 trading range.

That's also the message being telegraphed by the Special K in Chart 4. This indicator combines the momentum of the short-, intermediate-, and long-term KSTs into one comprehensive indicator. The shaded areas tell us that, when both series are below their respective MAs, the Index usually suffers. This model is also in a negative mode.

There are two other things to note. First, the Special K is already at a post-2022 (and therefore trading range) low, unlike the Index itself. That's important, because there is an established rule that says "Where the Special K, goes the price usually follows." Second, the solid green trendline marks an important level of resistance. However, when it is extended in the form of the red-dashed line, it intersects with the lower part of the 2022-2024 trading range, thus representing an even more significant pivot point.

Reverse Engineering

What is bad for the dollar is good for the other currencies when measured against the dollar. In that vein, Chart 5 features the Canadian dollar, pound, euro, and yen. All have already violated 2-3-year down trendlines and look headed higher, certainly enough to result in a downside break in the Dollar Index trading range referred to earlier.

Chart 6 tells us that the euro has broken above its secular down trendline and tentatively completed an important base. The currency is also above its 12-month MA, a move which is being supported by a rising long-term KST. Since the euro has a 57% weighting in the Index, its breakout in Chart 6 argues for the completion of what is currently a potential dollar top (see Chart 1).

Chart 7 shows a more solid break by the Pound, which looks set to challenge the 2018 and 2021 highs just above the $1.40 level.

Even the much-maligned Japanese yen appears capable of achieving higher levels. That's because it has managed to clear its 12-month MA and gain the support a rising long-term KST. Those signals though, are not as impressive as the trendline breaks in the euro and pound.

Finally, the WisdomTree Emerging Currency Strategy Fund (CEW) has recently experienced a decisive breakout from a 14-year base. Chart 9 also indicates that swings  in the currency are usually replicated by similar rallies and reactions in the iShares MSCI Emerging Markets ETF (EEM). As a consequence, the post-2013 high in the CEW suggests that at least a test of the 2021 EEM top is in the cards.

Conclusion

The Dollar Index has reached the lower area of its recent trading range. Notwithstanding a near-term oversold bounce, an examination of the technical position of some key currencies suggests they are headed higher, and that should manifest itself in a lower Dollar Index.

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.