With the dollar (NYSEARCA:UUP) index holding around the 100 level and the currency definitely after printing a swing low, the dollar bulls are back out in force. However, there could be a risk of a head and shoulders pattern here which would be bearish long-term for the greenback. In this particular rally, the dollar would at least need to take out and stay above its current 50-day moving average, which is around 101.38. Nevertheless, because of the steep slide the greenback has had since the start of the year, its 50-day moving average is currently lining up with the Fibonacci 50% retracement level. I would be very surprised if the dollar manages to stay above these important technical levels in the weeks to come. The RSI momentum indicator is nearing overbought levels already. This indicator is particularly accurate when an asset class, currency or stock becomes overbought in a downtrend which we have had in the greenback since the start of the year.
Therefore, if the currency turns over at the Fibonacci retracement or the 50-day moving average, then the real question thereafter will be whether the greenback will be able to stay above its February lows. If it doesn't manage to hold the lows it printed on the 2nd of February, then the probabilities would be heavily stacked in favor of a multi-year top being already in for the dollar. This is something that no analysts are talking about at present as present sentiment readings back up.
However, it is the euro that is probably going to dictate where the dollar rallies at least in the initial part of this year. As we can see from the chart below, the euro has always rallied sharply out of its yearly cycle lows. The 2016 YCL (yearly cycle low) took place just before the turn of the year and its rally to date has been strong. However, the weekly stochastics are nowhere near overbought and this indicator I feel will at least need to get to similar levels like we had in the past to ensure the euro prints a temporary top. From a technical standpoint alone, the euro should have at least another month or two before topping out which is bearish for the dollar.
We are about to find out pretty soon whether the strong rally in the dollar since November was election-driven or fundamentally driven. We will know from its current daily cycle. If the dollar continues to trade in an up-trend, the current daily cycle should not top out for at least another 20 trading days. Why? Because daily cycles in the dollar can usually last up to 40 trading days. If the dollar is going to new highs, this cycle cannot top for another 20 trading days at least. If, however, we soon get a top in the dollar, I foresee its recent lows being broken which will mean this daily cycle will end up being left translated, which would mean a down-trend would be confirmed.
To sum up, the dollar has to stay above its recent lows for at least another month or so or technical traders will exit. It also faces a headwind from the euro which is expected to continue rallying aggressively. US stocks which derive a lot of their sales from overseas markets will benefit from a weaker dollar. However, a softer greenback plays into my thesis to hold precious metals positions until at least mid-year. As the chart illustrates below, since the start of the month, the whole precious metals complex (NYSEARCA:GLD), (NYSEARCA:SLV), (NYSEARCA:GDX) has rallied alongside a stronger dollar. Therefore, if the greenback prints a left translated cycle, it should be off to the races for commodities, but precious metals in particular.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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