Is the Almighty US Dollar bottoming?
Normally when I view a chart of a stock or index I like to start out with the long term monthly look and work my way back to the weekly, daily and then minute charts for perspective. As I have already done my homework and looked at the long term charts, we will start with the 60 minute chart and work our way out to the long term view of the dollar to see what may lay ahead in terms of a trend change.
UUP - 60min, HLC (dollar proxy) chart
The 60 minute chart above shows a beautiful bull flag halfway pattern that formed off the December lows. This bull flag is also part of a bigger pattern that is completing and is giving us an early heads up as to a possible trend change for the dollar. I’m using the UUP, an ETF proxy, for the dollar.
The daily chart of UUP (below) puts our little red bull flag halfway pattern into perspective as a right shoulder of our current head and shoulder base that has actually been forming since September 2009. We broke the neckline (NL) last Friday with a nice big gap and now we are in the process of back-testing the breakout around 23.20. This NL has acted as support or resistance since its beginning. Below the NL is resistance and above the NL is support. We should know in a few days as to the validity of this all important trend line as we come into the back-test area.
Next is the actual daily dollar chart going back to the double top at the end of 2008 and the beginning of 2009; it includes most of the patterns that made up downtrend. This chart is a little busy so we will just focus on the down sloping, black dashed rail and the moving averages (i.e. 150 dma and 50 dma).
First, the down sloping black dashed rail is a combination support and resistance rail. Above it is support and below it is resistance. Just follow it down where it started in January 2009 to the present and see how cleanly it held support and resistance. Once we broke through it in May 2009 it reversed its role and became resistance until a little over week ago where we gaped to the upside and it’s now in the process of back testing it from the topside which should now be strong support.
You can now see why our little red bull flag that formed on the 60 minute chart is so important as that bull flag gave the new uptrend enough strength to break above the now support rail. One last note, on the down sloping support and resistance rail: notice how it held resistance for almost 3 weeks forming the top red rail of our bull flag. What I like to see from a technical perspective is how we act at a critical point on a trend line to see if it is “hot” or not. There is no doubt in my mind that the support and resistance rail is hot and we should now trade above it for the foreseeable future.
Now on to the 50 dma and 150 dma. You can see how well the 50 dma has held support on the way up and resistance on the way down. The 50 dma and the 150 dma are getting close to crossing over which will be another buy signal for the dollar, so we need to keep an eye there for more confirmation.
Next we look at a daily chart of the dollar to show how it has been affecting the stock market.
$USD vs. $SPX - daily, HLC chart
Most of the broad market rally period, over the last 10 months, has been accomplished with a weakening dollar to help it. Notice the purple, vertical rail pin pointed the top in the Dollar and the bottom on the SPX. Also notice where we have just broken above the old support rail turned resistance rail and now turning to support once again. The breakouts for the dollar and the SPX are almost identical as the dollar breaking above the resistance rail and the SPX breaking down below the bottom rail of the rising wedge which is showing the inverse correlation between the two.
There is so much technical information on the daily chart that I saved the bullish falling wedge for this segment to add another clue to our detective work in calling a bottom on the dollar. The breakout of the blue falling wedge to the upside was our first real clue that things maybe changing for the dollar as we are now setting up higher highs and higher lows, the first thing you have to do to form an uptrend. The pieces of the puzzle are coming together now and a look at the longer term charts will add further evidence to a meaningful bottom being put into place on the dollar.
This is where the plot begins to thicken as we turn to the longer term charts for clues as to what direction the dollar is likely to go over the years ahead. First, lets look at the weekly H&S bottom that was discussed early on to show how well it fits into the overall long term scenario.
Notice how many times the UUP hit the top of the support zone, brown area at the bottom of the chart, and compare it to our most recent bottom for our H&S reversal pattern off the same area. We can’t say at this point how fast the dollar rise will be but if you look at the 2008 rally it was pretty impressive.
With this next chart you will be able to see where I’m going with this post and how important everything we’ve discussed up to this point becomes relative to the long term change that maybe taking place at this very moment. The H&S bottom on the daily chart above is actually the bottom right shoulder of a much larger H&S bottoming formation on the monthly dollar chart.
It hardly shows up on the monthly look but its there for all to see if one can look at a chart with an open mind and not make the chart say what you want it to say. We are at a point in time similar to the bottom in 2008 that made the head of this giant H&S reversal pattern. I took a lot of flack after posting that bullish falling wedge back in September of 2008. Believe me it was a minority view at the time just as it will be this time. When we broke out of the bullish falling wedge I didn’t know how things were going to play out, I only knew that the bullish falling wedge was an important pattern and to pay close attention to it in the future.
The future is now and it’s playing its role in the reversal of an eight year bear market for the US Dollar. We still have a lot of work to do on the upside but I believe the foundation is being built for a much bigger rally for the dollar in time and price.
$USD - monthly long term channel
I would like to show one more very long term chart of the dollar to put everything into a visual view of what the dollars has done since 1984 (see chart above). It’s quite obvious, by looking at the very long term chart of the Dollar, that it has been in a confirmed downtrend for 25 years punctuated by a 5 year rally form 1995 to 2000 where it then went back into another steep decline that has led us to our current position on the chart.
You can draw your own conclusions of how a strong dollar might affect the economy, stock markets or commodities going forward. I know this view is not popular right now but the charts are speaking and I have to listen to them no matter what I think the markets should do.
All the best to everyone and happy trading…..Rambus
