In this post, I would like to offer a global outlook for the gauge of the most financial assets, for the US dollar via its index DXY.
It is important to understand the global trend for the dollar to plan our precious metals strategy. I've included four charts below with different periods of observations and you can judge for yourself what you are after.
Chart 1. Dollar Index Monthly (1985-2016): Looks Bad!
Chart courtesy of tradingview.com
On the monthly chart above, we see that the dollar dropped from the 125+ levels, then made a correction to the blue A point at the 121 level. After that, from 2001, we saw another massive sell-off of 51 points down to the 70 level in he notorious 2008.
After the index had slashed almost half of its value, the market reversed up, but couldn't break through the 90 level and stopped in a very long triangle consolidation (not shown) with a sharp apex between the 78 and 85 marks. The latter was penetrated to the upside in the autumn of 2014 and the dollar quickly grasped above the 90 level and hit the psychologically important 100 mark.
Surprisingly, that was all! No follow-through buying above the 100 level appeared and the index fell to its former resistance at the 93 area. This past summer we saw another attempt to assault the 100 mark and again the dollar failed to break the resistance. This time, we have fallen slightly lower to the 91 level below the dashed orange midline of an uptrend.
If we assume that the 2001-2008 move is the first part of a zigzag down and label it as the blue AB segment, then the 2008-2015 move was a correction before a new move down labeled as a blue CD segment. The target is quite ambitious for dollar bears and located at the distance equal to AB segment at 50 level, another psychologically important area.
Let's read the other 3 charts to make a final conclusion.
Chart 2. EURUSD Monthly (1993-2016): Double Bottom!
Chart courtesy of tradingview.com
I've included EURUSD charts in my post as the EUR is the largest component of the dollar index and we can support or even enlarge (and you will know why at the end) our DXY view with it.
The chart structure looks similar to the previous DXY monthly chart but inverted. I added the annotation for the Double bottom reversal pattern with the neckline at the 2015 high at 1.1714. If the euro manages to pass it over, then we can jump to the 1.2960 level just below the downtrend's upside. And it will be the first step to the blue CD segment target at an uncharted territory (for the euro as a single currency) at the 1.8270 mark.
So far we have confirmations of the bearish dollar scenario. Let's move on.
Chart 3. Dollar Index Quarterly (1969-2016): Break up!
Chart courtesy of stooq.com
I was not satisfied with the lack of data showing the area from which the dollar index dropped down from those 120+ levels. And I finally found a more extended chart on the web which starts from 1969. This discovery puzzled me with 2 additional peaks on it as I thought there was only one and this absolutely changed the game.
In 1978 (the year of my birth) the dollar rocketed to double its value from the 82 level to the 164 level in 1985, what an astonishing move! Then it swung back down with the same strength and the index quickly lost all of its gains and dropped to the 85 level in 1987. Then we can see an 8-year consolidation in the 78-106 range. Only after that we can see another move up to the 121 level (the high I was searching for) and then move down to the 70 level, which can be seen in Chart 1. The amplitude of the moves were shorter with every swing up and down. The zigzags were followed by low-volatility consolidations.
The descending orange trendline was broken up at the end of 2014. And now the picture looks completely different. In my earlier posts, I showed you the healthy market moves after we get a breakout the pullback follows. So on this chart, it can be read as the breakout and pullback to the broken trendline at the 83-84 area. This chart puts the big question for the validity of AB/CD concept shown in the Chart 1.
But let's read the last chart which is also extended to make an ultimate assumption.
Chart 4. EURUSD Quarterly (1971-2016): Very Strong Support!
Chart courtesy of stooq.com
This long-term chart of the EURUSD also shows high amplitude swings as did the DXY quarterly chart. But if we draw the trendline between the 1985 and 2000 lows we get an absolutely different outcome. This support line wasn't broken down like on the DXY chart (upside). Instead, we see that the price was rejected on the upside making a double bottom.
The main reason for these controversial moves between the DXY and the EURUSD is the different depth of extremes in 1985. The dollar index showed almost equal swings up and down between 1978 and 1987. The euro started to swing down later in 1980 and it was a shorter than the swing up between 1985 and 1992. Indeed, it changed the geometry of the trend points. Most probably this mismatch was caused by the other components of the dollar index as the euro makes up a significant 57.6% of it, but not all 100%.
Final conclusion
3 of the 4 charts point at an upcoming long-term weakness of US dollar. And only one chart shows that we are just in a pullback before a new strength. I think we should wait for further price action, first to see the reaction of the trendline for the pullback down at the 83-84 level according to DXY chart #3. If we do not get there, and the index reverses to the upside, then we should wait for the reaction of resistance at the 100 level to judge if it's a continuation of an uptrend.
And what do you think?
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Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
Dear Aibek,
I suggest you to study and provide post about chart analysis of Indian Rupee v/s USD. Exchange Rate. This is more significant to check Dollar's movement against emerging countries, also you can find some co-relation and indirect impacts of Gold and Crude Oil Down trend on US Dollar.
Dear Rasesh,
Thank you that you keep reading and for suggestions you have made.
I will see if I can find something interesting there for you.
I wonder which side did you vote for the dollar index and why?
Dear Rasesh,
The required analysis was posted.
Please go to http://www.ino.com/blog/2016/05/the-dollar-takes-em-down/
Yeah, figuring out the dollar is like shopping in the vegetable section of the supermarket. But what makes it so attractive is the fact that the currency market is some 40 times larger than the combined US equity market, and more
world class. have a nice day.
Dear Ivana,
Thank you for this rich comment with quite strong points.
Best wishes, Aibek
the dollar will fall in the short term...Sterling will appreciate and the Euro will go along with that till EURUSD gets to 1.20. But the ECB will panic and do all it can to reverse the Euro's appreciation. That's when the dollar will start its new ascent. You will not see EURUSD at 1.82. The ECB will never countenance it.
the crises can last for 20 years or better cant pay our unforgettable debt BROKE AND MOST AMERICANS DONT KNOW IT !!!!!!!!!!!!!!!!!1 bob
Consistently prediciting anything is impossible so why even make an attempt? Support and resistance is a waste of time. The concept is not a relevant factor. It’s hype which is what drives the investment/trading circus, but useless in real life trading.
Judging by the economic data currently available I think that FED's tightening and hence the dollar's rise is unlikely in the near future (the unemployment rate hasn't changed, the PMI index is falling, inflation is still low at 0.9% i.e. still far below the target of 2%, GDP is not rising and the rising dollar would make the Chinese economy more competitive, which would reduce net exports. In addition to that, low oil prices coupled by a high dollar would spell doom for American exports of the commodity.)
With all the uncertainty about the forthcoming elections, the dollar could fall in the short term. So, in accordance with all these reasons, the dollar should be shorted, which is obviously the tactic many investors will apply, judging by your short survey above.
On the other hand, massive investor behaviour of this type could produce a counter movement in the dollar- due to too many investors taking short positions, the value of the dollar might rise in the short term, so maybe, in accordance with this, it would be reasonable to go long on the dollar.
As far as the long term is concerned, my opinion is that the dollar will rise, because the crisis can't last for ever and, after all, America still attracts much of FDI. That's why I voted ''rise'' in the survey above.
Dear Ivana,
Thank you for this rich comment with quite strong points.
Best wishes, Aibek