U.S Dollar: Chart Points to Major Reversal/Rally

Having stealthily formed a bottom, the dollar's chart looks like May-July 2008, just before it blasted off.

The obituaries on the dollar are flying fast and furious, but they are premature. Astute reader Robert L. asked for my views on the dollar losing its coveted reserve status in pricing global commodities. It seems to me there is plenty of sound and fury being expended on wild speculations about secret meetings and the looming demise of the once-mighty dollar but precious little illumination.

Rather than focus on "maybe's," let's look at a chart of the dollar from the point of view of basic technical analysis. Charts have the distinct advantage of not even pretending to reflect the fundamentals--whatever they might be.

I have written quite often on the dollar over the years--most recently:
Why The Dollar May Not Be Doomed (September 24, 2009)
Inflation, Commodity Prices and the Dollar (September 29, 2009)

I refer you to three entries I wrote in the March-early August 2008 timeframe for one good reason: the dollar exploded upward in August, gaining 22% in a mere four months. I laid out the case for just such a reversal in these entries:
A Technical Look at the U.S. Dollar's Decline (March 11, 2008)
Has the Faltering Dollar Reached Maximum Pessimism? (May 6, 2008)
How Goes the Dollar? (August 7, 2008)

Notice how the chart in March-July 2008 looks eerily similar to the last few months in the dollar chart. The dollar stumbled along for a miserable five months in 2008 (March - July) before reversing, and the stochastic has been oversold for the past five months.

Negative sentiment also reached an extreme in the 2008 timeframe--and here we are again, with dollar bulls a nearly extinct species, limping along in the single digits (i.e. 91+% are bearish and 9-% are bullish).

1. Note the previous period of extreme negative sentiment. That 22% rally in the following four months works out to a 66% annualized return.

2. Note the divergence in the MACD and the strong possibility of a positive cross in MACD.

3. Note the five months of oversold stochastics. From one technical point of view, "the bigger the base, the higher the rally."

4. Note key support just below 76. Yes, any support can be broken but notice how price has been basing for four weeks. This could go on for another month or two, as 2008 illustrated, but the stochastic and MACD suggest a reversal is more likely than a crash.

5. Note the bullish cross of the 50-day moving average above the 200-day moving average. Yes, the 50 could drop below the 200-day, but there is no getting away from the bullish signal of the 50-day crossing above the 200-day.

6. The bollinger bands have stopped declining. Price has been hugging the lower band, and since price tends to fluctuate from lower to upper and then back to lower, that suggests a rally to the upper band is likely.

As for fundamentals: As my esteemed blogging colleague Mish noted in Why Would Anyone Want To Hold Dollars?, the crowd that wants the dollar to decline looks smaller than the crowd who wants it stronger. This was my point in Why The Dollar May Not Be Doomed.

Recall that the Chinese renminbi (yuan) is pegged to the dollar. It could be argued that the Chinese want the dollar to stay depressed (despite their loud public complaints to the contrary) because a weak dollar translates into a weak yuan, which means Chinese goods remain very competitive in the non-dollar economies (Eurozone and Japan).

It could also be argued that the Chinese would welcome a stronger dollar (as would the Japanese) because that would boost the relative value of their immense dollar holdings. Which one is more important to the Chinese? There are probably two camps in the higher reaches of the Chinese bureaucracy, arguing over this same issue.

Amidst all the noise, here is one context to consider. Let's stipulate that the Fed and Treasury are busy devaluing the dollar via endless creation of new dollars. Let's say they've created $2 trillion in new dollars by various means (a guesstimate).

The global economy lost $40 trillion in the financial crash. U.S. households lost $12 trillion, and the U.S. is about 25% of the global economy. Thus $40 trillion in losses is conservative.

Will printing/creating a meagre $2 trillion really crash a global currency in an environment in which trillions of dollars are needed to pay down debt? And is the U.S. the only nation expanding money supply and credit? Once again, Mish offers an insightful overview in Competitive Currency Debasement - A Look at Rampant Monetary Expansion In China.

Rather than attempt to parse the 3-D chess game that is forex (foreign exchange), let's stick with charts. Regardless of the fundamentals and the "guaranteed" collapse of the dollar, the chart of the dollar looks ripe for reversal.

Let's also recall one of the themes of this site: there is no absolute value, only relative value. The dollar could tank against gold and be rising against one currency even as it drops against another. The way to increase purchasing power is to be on the right side of a trade which is about to reverse big-time.

Disclosure: I may buy on some UUP (US dollar Bullish ETF) in the near future.

Comments

[TeresaE:]

The dollar "rallied" last year for a very simple reason, the Fed was flooding the WORLD with fake dollars.

If the currency value went up, then the "help" flooding into foreign countries, other central banks and our local banksters was worth more for them to play with.

My question has been, and will continue to be, what happens once we are no longer needed?

We haven't been "wealthy" in a long time, we are just indebted. The past nine years has been nothing but trading assets for debt. Now, the assets are being sold to foreigners but the debt remains.

At what point do we realize we won't be needed anymore soon?

As for lowered dollar making our "exports" more affordable, the only thing we are exporting are assets, businesses (jobs) and natural resources. Boy, isn't that going to be great once this farce ends.

We have no jobs, a Congress intent on destroying the few left, increased mandates and expenses (with no incomes) and are selling our resources to everyone except us. Great plan.

Oct 09 12:07 PM

[bottoms-up:]

Add to that TeresaE Americans have lived for decades at the expense of others in the world.

I think the "jig is up."

Oct 09 12:24 PM

[AndrewBaker:]

The dollar is in long term decline, not least because other - mainly eastern and emerging - currencies are on the ascendancy. However, short term, I agree that on a chart reading, there is a rally coming soon that will see it rise. Sadly, I feel that afterwards, it will decline again with lower highs and lower lows the recipe for quite some time to come.

Oct 09 12:29 PM

[Donald Ingram:]

"Reading" charts is like looking at tea leaves - it concretely tells you the cup is empty! They are but an aid to forming an opinion on which direction to focus your thought. After careful consideration of all the facts, you place your bet and take your chances. The market will do what it does best - surprise. It is not a rational place. To expect a given situation to perform in the manner formed by your thought process is to be disappointed. To base your premis solely on chart work is to invite disaster.

Oct 09 12:57 PM

[Big Bubbette:]

Somewhere in the not too distant future a plonker is going to land in the punch bowl. Not sure what it will be, where it will be, but it will bob to the top and various house of cards on artificial life support from the Fed and others, will start to fold. California is bankrupt, which that on its own could prove to be what pushes this off a cliff. Israel takes out the Iranian nuclear plants., maybe commercial real estate. There is a long list of possibilities that could start the party.

The government has shot every wad they have. What will they do stimulus II, III and beyond. Buy more companies too big to fail? Bail out government motors again? Have more artificial bankruptcies? Print more trillions? At some point when the tab comes due the taxpayers are going to drop under the debt load. Zombie taxpayers? The Fed is talking about a VAT, the State of California is talking about a SAT (tax on services such as accountants, lawyers, etc. apparently designed to drive out whatever business remains in the State). When you add up the VAT and the SAT the taxpayers will have SQUAT.

But on the bright side Obama won a Nobel Prize. Laughter is the best medicine. A new term needs to be added to the lexicon, to be "Nobeled".

If you Google the topic the UAE has been discussing creating their own gold based currency for some time. Oil will gradually move away from the dollar to hedge. I think the first to make that move was Saddam Hussein.

Oct 09 01:20 PM

[Jasper M:]

On Oct 09 10:31 AM Dion134 wrote:

> yeah, like it took Zimbabwe

Actually, Zimbabwe's money supply was never credit based, as the current regime started with precious little confidence from the world's banks - thus it started quite small enough for their printing presses to flood the system. And that Still took Years. The world's press only notes the dramatic end game.
Here in the US, any attempt to inflate by printing press would be swimming upstream vs. the collapse of the entire money supply debt pyramid (which said printing would actually accelerate!). Only after that was done, 90+% gone, would reserve notes be a majority of the money supply, and printing = inflation.

Oct 09 01:39 PM

[blacksilver:]

If you want to see where the dollar is headed go to you tube and type in"Jones on gold and silver"

Oct 09 02:23 PM

[ain't no fo...:]

Agree on some of your chart observations but it also depends on the parameters you punch up, and how you interpret them.

I'm using Murphy's charts also, but a weekly 2 year, arithmetic, with 9, 50 and 200 day Exponential MA (EMA) and I DON'T get a 50/200 day bullish cross, not even close. I get a dollar that can't even trade above its declining 9 day EMA, just keeps getting walked down and bumps its head on the 9 every time it tries to break thru.

I also show a 3 week bear flag on the candles through last week as they traded up to tag the 9, with a topping stick doing the tag of the 9, and then immediately it sold down hard this week, a classic bear flag tag of an EMA and resultant sell-off.

I also continue to show the 50 and 200 day EMA's in a declining trend, and note that even where your 50 did do its bullish cross of the 200, both the 50 and 200 are nevertheless still in declining trends.

Like you I get the flat oversold sto, but what you call positive divergence on the MACD is what I call a flatline on the histogram just under the 0 line.

If I were to completely take off all the EMA's and momentum oscillators from the chart, I would have a picture of a rolling or H&S top that formed from last Fall to early Spring, and a steadily declining series of candles, punctuated by two flat 4-5 week periods similar to the one you are hanging your hat on, which occurred in June and again in late July-late August and which subsequently failed.

Were I to not look at anything fundamental, technical or political, but just this picture without indicators, I would be calling for a base to form at 72.

I explain this in detail because I will now try to paste that link here, which SA will not allow me to do because they consider it spam, not the kind of spam that the moron cetin publishes and which SA evidently seems to LOVE because they continue to allow it, but because my technical analysis links are evidently evil incarnate. Of course, I do not pay SA to post MY spam. (Can't wait for the board nazis to see these comments).

stockcharts.com/h-sc/u...

Oct 09 02:52 PM

[ain't no fo...:]

holy cow batman, they allowed me to publish it... YIPPEEEEEE!!!!!!


On Oct 09 02:52 PM ain't no fortunate son wrote:

> Agree on some of your chart observations but it also depends on the
> parameters you punch up, and how you interpret them.
>
> I'm using Murphy's charts also, but a weekly 2 year, arithmetic,
> with 9, 50 and 200 day Exponential MA (seekingalpha.com/symbo...)
> and I DON'T get a 50/200 day bullish cross, not even close. I get
> a dollar that can't even trade above its declining 9 day EMA, just
> keeps getting walked down and bumps its head on the 9 every time
> it tries to break thru.
>
> I also show a 3 week bear flag on the candles through last week as
> they traded up to tag the 9, with a topping stick doing the tag of
> the 9, and then immediately it sold down hard this week, a classic
> bear flag tag of an EMA and resultant sell-off.
>
> I also continue to show the 50 and 200 day EMA's in a declining trend,
> and note that even where your 50 did do its bullish cross of the
> 200, both the 50 and 200 are nevertheless still in declining trends.
>
>
> Like you I get the flat oversold sto, but what you call positive
> divergence on the MACD is what I call a flatline on the histogram
> just under the 0 line.
>
> If I were to completely take off all the EMA's and momentum oscillators
> from the chart, I would have a picture of a rolling or H&S top
> that formed from last Fall to early Spring, and a steadily declining
> series of candles, punctuated by two flat 4-5 week periods similar
> to the one you are hanging your hat on, which occurred in June and
> again in late July-late August and which subsequently failed.
>
> Were I to not look at anything fundamental, technical or political,
> but just this picture without indicators, I would be calling for
> a base to form at 72.
>
> I explain this in detail because I will now try to paste that link
> here, which SA will not allow me to do because they consider it spam,
> not the kind of spam that the moron cetin publishes and which SA
> evidently seems to LOVE because they continue to allow it, but because
> my technical analysis links are evidently evil incarnate. Of course,
> I do not pay SA to post MY spam. (Can't wait for the board nazis
> to see these comments).
>
> stockcharts.com/h-sc/u...;p=W&yr=2&...

Oct 09 02:53 PM

[Benjamin Bo...:]

This is a technically bullish chart??? What are you talking about? People you make money investing by waiting for good setups. Don't take longshots like the one that is being proposed here. At the very least wait until you see a confirmed reversal. This chart is U-G-L-Y.

Oct 09 03:23 PM

[GB BAJAJ:]

buy gold, sell dollar

Oct 10 05:04 AM

[L.A. Igrok:]

The reasons the author is making for a future USD rally are quite weak, but the real probability of a such is very strong indeed.
Also not every major currency should be equally susceptible to potential USD strength. AUD, CAD and JPY look more vulnerable than the other majors at the moment.

Oct 10 08:02 AM

[osaycanuthink:]

the support was at 80 and measuring classically the break indicates a move to 72. although a rally back to breakout is possible

Oct 10 09:57 AM

[AllStreets:]

Tend to agree that dollar is technically oversold and a significant intermediate "rally" or mild corrective period can be expected in the near future. View is supported by the fact that Treasury securities have been overbought and now appearing to having a reversal, and the yield curve strongly positive. However, any such developments are likely short lived. You imagine what would happen to the economies of the world with interest rates rising significantly any time soon. That phase is down the road a piece after economies clearly start recovering robustly.

Before it happens most likely the U.S. will have a period of calamitous bankruptcies and foreclosures as high unemployment continues and benefits run out. This time is very different. In all recessions in the past 40 years, unemployed folks could get through a recession by borrowing against the grown equty in their homes with asset based equity loans or refinances (no ratio or no doc). Now there are no such loans and no grown equity; only the employed are allowed to borrow, and cash out limited to 80% LTV/CLTV. The lenders are guaranteeing the further demise of the middle class, and lots more lenders will fail. Meanwhile I don't see how state governments are going to balance budgets without a round of major spending cuts, and that means more unemployment. Can the U.S. government solve these problems? Maybe, but there's no political will or creative programs. Saving lenders without bailing out borrowers doesn't work for the economy.

Oct 10 10:49 AM

[sako shooter:]

The yuan and the dollar part company when you look at their relationship to the price of gold. The price of gold in dollars over the last four years has risen significantly more than the price of gold in yuan. The price of gold is telling us that the world has little faith in paper and little faith that catastrophe is not lurking around the corner. I don't see a dollar recovery for many years, if ever, as we have debased the dollar and shaken its once vaunted confidence to the point that it might never recover.

Oct 10 02:51 PM

[DerekNJND:]

dollar bulls need to stop citing the technicals for 2 reasons:

forex technicals do NOT behave the same way equity technicals do, and indicators like MACD and stockastics are far less reliable, in fact, almost useless in forex.

even if you concede the technicals, the setup for a reversal has been in place for MONTHS now, with RSI and MACD divergence vs price on the daily, intraday and weekly charts ...but the big reversal has yet to come. at some point, the setup really doesnt make the reversal case stronger, only an actual reversal will make your case stronger

Oct 10 05:31 PM

[L.A. Igrok:]

Yeah, right. Pretty much like saying: "The law of gravity works differently in America than in the rest of the world. Almost never works, actually." In fact TA would work for any chart regardless of its nature. Even for someone's cardiogram. Just has to be applied correctly,

On Oct 10 05:31 PM DerekNJND wrote:
dollar bulls need to stop citing the technicals:
forex technicals do NOT behave the same way equity technicals do, in fact, almost useless in forex.

Oct 10 07:56 PM

[Shishir Nigam:]

Here are some technicals for you: The C$-US$ just broke it's support and it's only a straight path to parity thereafter. While the US$ is oversold in the short-term, fundamentally, there are too many reasons for the dollar to fall.

The biggest of those reasons: The US$ has now become the borrowing currency in the carry trade, thanks to the low interest rates. Unless there is another huge set back to the global economy/equity markets, money will continue to flow to markets abroad, tanking the dollar. People sell the US$ to invest in foreign currencies.

For more analysis, check out my blog: youngandinvested.com

Oct 10 11:08 PM

[Plan B Econ...:]

If the dollar reverses, expect a stock market correction.

The S&P 500 is fueled by money printing. Take a look at its track record if it were priced in gold...at the 2009 lows it was down -83% from 2000.

www.planbeconomics.com.../

Oct 11 12:49 AM

[L.A. Igrok:]

Here is some TA for you: The buck will gain 8-10% against CA$ before the end of this month and then will add to this gain another 8-10% by the end of the year.

On Oct 10 11:08 PM Shishir Nigam wrote:
Here are some technicals for you: The C$-US$ just broke it's support and it's only a straight path to parity thereafter. While the US$ is oversold in the short-term, fundamentally, there are too many reasons for the dollar to fall.
The biggest of those reasons: The US$ has now become the borrowing currency in the carry trade, thanks to the low interest rates. Unless there is another huge set back to the global economy/equity markets, money will continue to flow to markets abroad, tanking the dollar. People sell the US$ to invest in foreign currencies.

Oct 11 03:38 AM