Originally published October 26th, 2009.
The dollar is at a crossroads and there are two probable scenarios. One is a final plunge following the recent grinding decline to an intermediate low that is followed by an intermediate reversal. The other is that it suddenly breaks out upside from the severe downtrend it has been stuck in since early March and rallies strongly, strongly because it is likely to be juiced by a sudden wave of panic short-covering.
On our 1-year chart we can see the downtrend in force from March and how, although it has continued to drop stubbornly to make a succession of new lows since July, the lower support line has converged towards the more steeply falling top line of the major downtrend - the downtrend appears to have morphed into a bullish Falling Wedge, although we cannot, of course, be sure that this is what it is until it breaks out upside from the downtrend, as until it does there is always the chance that it could simply breach the support line and plunge towards the original lower channel line, which is the pale red line produced into the future. However, we will know know soon enough which direction it will take as the Wedge is rapidly closing up, meaning that we should see a strong break one way or the other shortly.
This dollar chart certainly looks grim at first sight as superficially there appears to be little to stop it plumbing new depths, and there is certainly scope for it to do so as measured by short-term oscillators such as the RSI and MACD indicators (not shown) the dollar is not heavily oversold right now, due to the incremental nature of its recent decline. However, the Full Stochastic shown at the top of the chart, which is a fairly reliable indicator, does show it to be heavily oversold with a strong chance of turning higher, in addition to which the index and its 50-day moving average have now opened up a large gap with the 200-day, increasing the chances of a significant intermediate reversal soon.
A bullish interpretation of this dollar chart accords with the bearish looking charts for stock indices shown in the Market Crash article posted last week. Pronounced bearish Wedges are evident on the charts for the S&P500 index, the S&P500 index in Euros, where the convergence is very strong, and the HUI index and the Toronto Stock Exchange Index (CDNX). It accords because we would expect to see the dollar rally when stockmarkets drop, and we may see a repeat of last year with investors panicking into Treasuries, even if this time round they are a little more cognizant of the fact that these are not exactly the best places to put your money. While silver is looking ready to correct back substantially with stockmarkets, gold continues to look strong thus far, which is something of a riddle that could be explained by investors possibly panicking into Treasuries AND gold this time round, which would mean that the dollar and gold could rise simultaneously. This is unlikely to help PM stocks though, at least not initially.
One of the biggest warnings that the dollar may be about to break sharply higher is the near universal bearish sentiment towards it, which is reflected in the plethora of dollar bearish articles doing the rounds. Here are the titles of some of them that have appeared this month... "Dollar forced to Abdicate", "End of US Dollar Global Reserve Currency", "Faces of Death: the US Dollar in Crisis", "They're Destroying the Dollar", "Dollar to Extend Slide as Global Economy Recovers", "What Happens if the Dollar Crashes", "What if you were invited to a party to sell your dollars?" and "Bleak Week for Spurned Dollar". Links are not provided to these articles as apart from the invaluable time used reading articles on www.clivemaund.com you should be spending more time with your family.