US Dollar Short Technical Analysis

A brief look today at the dollar and where we are in the short term.

First, remember that the value of the dollar is in control, in our opinion here. If the dollar value holds up, as most conveniently measured by the US dollar index, then that's an all clear signal for purchases of Treasuries and holding cash. However, it is negative for the economy (the paper economy where devalued money is required to keep things afloat), negative for commodities, negative for gold, etc. So the game that's being played here is to devalue the dollar, making the US dollar index go lower, and spur on inflation in hopes that it will create jobs. In our opinion, it won't work, but that's the government game plan (as it always is). However, the government can't devalue too quickly or have a major disconnect occur or risk scaring away investors in US debt.

It's trying to walk the edge of a razor. Likely, at some point, the Fed and the government will slip off in one direction or the other.

On June 16, we showed this chart. where we felt the dollar could enter an inverse head and shoulders pattern and rise to 83 or so on the charts.


On July 6, the pattern had morphed into the following:


The dollar had been unable to complete the head and shoulders pattern, which we felt was bearish. Nonetheless, as the chart below shows, the dollar has continued to rise, though not as strongly as some believed it would.


The slow stochastic has turned negative. 50 has become resistance on the RSI. All that's left is for the MACD to turn negative. The dollar's in a pennant formation, which is usually a continuation of the trend--which was down before the consolidation period began. Given that the markets have been selling off and the dollar has not been strong, it is likely that there's more downside to come.

We don't believe the the downside to the market is done yet. We expect we'll make new lows in the stock markets and a flight to dollars again, even if short term, when it happens. However, if the dollar breaks to the downside in the next few days, which appears to be more and more likely, we'll probably see the stock market rise for a bit longer, along with commodities.

To confirm, let's look at the S&P 500.


Again, as commented upon a week or two ago, we have an active head and shoulders pattern which should bring the S&P to 830 or so. However, in the shorter term, it looks like we may turn up. The head and shoulders is active as long as we don't set a new high. Don't be surprised to see 950 before it rolls over and moves to 830, though the RSI would need to move over 50 for this to happen and the MACD need to confirm the change (you can see it has started to turn up). The next few days will be interesting as we should have some clear signs of a dollar break direction within the next 5 trading days. It may be a fast move that sucks people in before it rolls over...