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Thursday, November 6, 2014

Dollar index bull market?

The dollar index has been rallying very strongly since July.  Here is a look at the monthly chart.

The dollar index made a long term top between 2000 and 2002.  It made the ultimate bottom of that sell off in 2008.  Despite the FED printing up trillions of dollars it has traded sideways for years.  The rally last year actually turned ADX (marked by green arrow) higher.  This was the first rally since the major top that did that.  Notice that during the sell off earlier this year the ADX (marked by red arrow) actually fell.  On the current very strong rally ADX is once again rising.  That is a pretty good sign it is embarking on a bull market.  The current rally strongly broke through the 100  SMA for the first time since breaking it on the downside back in 2003.  It is now approaching the top of the trading range which should be significant resistance.  I would expect a pause or pullback here.  However, I think this has turned the corner into an actual bull market and is likely to break out above those 2009 and 2010 highs eventually.

What does that mean for the other markets?  Commodities in general are pretty strongly negatively correlated.  The gold bull market started at the same time the dollar index top formed.  A dollar bull market would very likely put a damper on all commodity prices.  What about stocks?  Check out this graph of long term correlation from What a Rising Dollar Means for Your Stock Portfolio.

Over the long history back to the 70s the dollar has been both correlated and inversely correlated with SPX.  However, over the last five to six years it has been the most inversely correlated in its history.  The fundamental reason for that inverse correlation is the amount of revenue that comes from outside the country these days.  A rising dollar will certainly hurt that revenue.

The dollar index needs to break out above the March 2009 high (89.62) to confirm the bull market.  Whether it can do that remains to be seen.  However, I think it is worth keeping an eye on just in case it does and that inverse correlation continues to hold up.  There have been many calls for the demise of the dollar on the internet.  Frankly I never really understood it.  Japan seems hell bent on destroying the Yen, but the U.S. has never really given any indication it wants that.  I don't expect that to change anytime soon.


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