Commodities Countdown

The Dollar Gets Bucked Off 2018-01-25 Video Recording

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The dollar fell harder than a rodeo cowboy flying off a bull this week. Getting bucked off of support, the dollar fell to a technically important low. The spike down marked some very important changes in trend. At this point, declaring a bear market in the dollar seems pretty obvious. By crashing below the low at 91.33, it has become very clear that the dollar is breaking down.


I find the daily chart shows the damage, but the real signal damage (indicator signals) is on the weekly chart. On the daily chart above, the RSI on the most recent bounce made it back up to 70. The weekly chart can give us bear market signals on the RSI that aren't available on a daily chart. We recorded the bear market signal in the US Dollar on this chart below on July 20th, 2017. By breaking below 40 and reaching 30, it gave us a clue that we were probably initiating a new bear market in the $USD. When it spent almost 3 months at a very low level, that helped our conviction that the US Dollar trend was changing. It went below 40 as the dollar dropped below 99. So that got us on the right side of the trade. Now the question pops up: "What's next?"

Everything looks so bearish and it is. What will it take to change the outlook?  With the US dollar being so vast, we should be able to see some divergence in momentum on the weekly chart before it changes meaningfully. We should also see the RSI make a higher low around 40 at some point. As well, the long term down trend in momentum off the April 2015 high and the January 2017 high would be clues that something is changing (chart below). That is currently not in play.

Interestingly enough, on Twitter today, there were still dollar bulls getting ready for a ripping rally to the upside. Rather than discard that principle based on the chart above, a longer timeline chart might divulge some information. This week, I think it does. There is a compelling reason to watch the next 1-2 cents on the downside in the Dollar. Notice the 6-year uptrend line in the Dollar shown in yellow. It meets where the red arrows are pointing. This won't be a trivial point on the chart. With the previous highs of the global financial crisis in 2008-2010 around 88, that would be a logical place to look for support as well. The coincidental support of the trend line and horizontal support suggests that level could be very meaningful. 

To counter that argument for support to show up soon, let's look the other direction or breaking down in the big picture.

Two pieces of major importance are shown on the chart above with blue circles or ellipses. The most recent blue circle was a very important area for the bulls to take control and run the Dollar higher. They could not, even with the massive backdrop of the tax cuts and the repatriation of capital. That looks a lot like the circle back in 2002 where the market paused for six months and obviously broke down. The signals on the RSI look the same to me. The second point is the MACD plummeted to major lows not seen in six years back in 2002 and recently in 2017. That severe plunge in momentum suggests the US Dollar has changed character and is a major bear market trend. With that as my bias, the MACD had small rallies but stayed negative for years in 2002,2003,2004.

The most recent, extremely short term information we have is a daily bar chart below. Most of the currency charts from the other currency pairs had outside reversal bars. An Outside reversal bar is defined as a moved higher than the previous day, reversed, then broke below the previous days low, and closed in the bottom half of the bar. This is a pretty solid suggestion that the upside is limited for now. It should not surprise us if we get some response (pushing higher) from the Dollar over the next 5-10 trading sessions. The Euro, shown with an orange circle instead of red, had a long tail above it and closed slightly lower from yesterdays close. Let's call it a bearish bar but not quite as bearish as an outside reversal.

Without question, the biggest change the last two weeks has been the absolute smack down of the US Dollar. 

On this weeks video recording, I covered off the indexes first, then the commodities because the indexes have been so resilient. I framed the commodity discussion in the context of the big bull market and the sliding US Dollar. In short, I expect the commodities to continue their big bull run but if anything was going to stop them, it would be a bounce in the US Dollar in the short term.

One issue currently is that the oil stocks are hesitating following crude higher. Crude is up 50% off the $42 low. Would it be wrong to expect a pullback of some sort?

 

The Dollar Gets Bucked Off 2018-01-25 from StockCharts.com on Vimeo.

Good trading,
Greg Schnell, CMT, MFTA.

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Greg Schnell
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com specializing in intermarket and commodities analysis. Based in Calgary, he is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is also the author of Stock Charts for Dummies (Wiley, 2018). Learn More
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