Let’s have a look at the US dollar index to gain a better understanding of what may lay ahead. When analysing any chart it is important to look at it from the short, medium and long term perspective. It’s the interplay between all of these forces that creates the structure we see.
When looking at the chart below it’s clear that the US dollar is in strong long term downtrend from its highs in 2001…
We’ve had an attempted false break of the all time low set in 1992 of about 78. This is a very major level and is the cause of the medium term sideways consolidation that has been developing for the past 5 years.
In the very short term we are seeing a clear downtrend from recent highs of around 90 set in March this year.
The point where the US dollar is right now is no man’s land. We are still under the influence of the short term range of last year between 78-89 which you can see on the shorter term chart below…
Even though we are below the bottom of that range, the gravity of its point of control is still to be felt and we could easily see a whip back rally inside this distribution which would be confirmed if the dollar index moves back above the 81 level.
This would give initial targets back to the point of control of 84 and from there back to the 90 high.
Conversely a failure back below the all time lows of 71 would confirm the failure of last year’s distribution and see the market heading into uncharted territory. Where it goes below there is anybody’s guess, but it would certainly be sending out some pretty clear warning signals to the market that US Dollar weakness is not ending anytime soon and any sign of a disorderly sell off through this 71 level could spook the markets into panic mode.
However, you should be prepared for a counter trend rally. RSI are entering long term oversold levels (although in a downtrend they can remain oversold for long periods of time of course, and so are not a good trading signal against the trend) and market news is constantly bearish on the US dollar so trader positions may be getting a bit full up on the short side.
A short squeeze would not be out of the question, but I wouldn’t trade a squeeze unless it breached the 81 level to confirm the re-entry into the last years range. It’s for this reason I think it is too risky to be placing any trades here.
A wait and see attitude is best at the moment.
I believe there is no doubt that the US Dollar is going to crack one day. You can’t print funny money forever and think that the rest of the world is too dumb to realise that their wealth is being confiscated by stealth. An exodus out of US Dollar assets is coming – it is just a matter of when. This year? 5 years? I personally think it will be sooner than later and it will be this day of reckoning that shapes all of the worlds markets for years to come.
So, keep your eye on the dollar!
{ 6 comments… read them below or add one }
Interesting article, I wish I could understand it. The wisdom I seek: Should I buy US dollars now, or wait a month or two? What would indicate the best time to buy US dollars? cheers
Murray – I agree the USD is in a tough position. When the day of reckoning arrives there will be clear winners and losers.
the US simply cannot continue to live beyond its means and try to inflate its way out of debt at the expense of the developed world much longer. The world can see what is happening and it is only faith that the US can repay its debt thats holding the dollar at the moment Once that faith disipates the dollar is not backed by gold so it will fall. High unemployment a move away from being an industrialised country and just relying on citizens to keep buying cannot work.
I have heard others talk of USD ‘dead cat bounce’ as well. Jim Rogers, Mark Faber, Peter Schiff, etc. To me it looks like a financial power game is being played out between fed up BRIC countries and the US and Britain. I am waiting for the USD rebound then I will buy as much silver and gold as I can get my tiny little hands on. The reasons: 1. Currency Crisis of USD and 2. Hyperinflation after the deflationary crash coming to your screens any time soon.
yep..its in a very sheizen position
USD will have up periods but should (fundamentally) continue to trend down toward lows (71)…thenupon politics and currency manipulations will drive it up…the trading oligarchy (Goldman’s, Morgan’s) will ensure this.
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