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Wednesday, November 14, 2012

The dollar index

It seems like nearly everyday I read a piece about how the dollar is going to collapse.  Is there any single asset more hated then the USD?  If there is, I have no idea what it would be.  The single best way to be a contrarian is to find extreme sentiment not backed up by the chart.  Lets look at the monthly dollar index chart.

The dollar index has broken through its 18 SMA four times since its bear market started in the early part of the last decade.  The first three times it went back down below it.  However, look at what is going on now.  Let me zoom in a little bit so you can see better.

Price went back and tested that 18 SMA over a two month period.  The last bar was a bullish looking doji bar.  So far this month price is above the high of that bar.  If this month ends above that last bar's high this will be a very bullish chart.  Look at the ADX.  The current rally is the first time the ADX (light blue line) has risen during a rally.  It is not a big move up, but we can see it dropped during the last two rallies in 2009, and 2010.  This time is potentially different.  With all the bearish sentiment out there I will be shocked if this chart does not have a bullish resolution of this pattern.  Everything is in place for a bull market in the dollar index.  The sentiment and chart pattern are picture perfect.  Gold and other commodities are usually inversely correlated to the dollar index.  The stock market has been both correlated and inversely correlated at times.  Which will it be this time?

The single most interesting thing to me about this situation is that this chart pattern formed while the FED is printing money like mad.  I think every dollar bear should be asking themselves why hasn't the dollar index made new lows since 2008.  That is over four years since we made a new low.  Maybe the long expected collapse of the dollar isn't going to happen in the near future.  It seems much more likely it will be the Euro that collapses instead.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.