Turnaround Time for the Dollar

In April, I wrote that the greenback was likely to experience an important move, but I wasn't sure in which direction.

Of the two benchmarks I offered for the the U.S. Dollar Index, the downside one was triggered.

Now, though, it looks like the dollar's fortunes have taken a turn for the better.

As you can see on the monthly chart below of the U.S. Dollar Index, it has been correcting for some time.

It's currently below its 12-month moving average and the red plot from the late summer indicates that the KST, an indicator I developed to pinpoint the market's proximity to major tops and bottoms, is bearish.

This means that the primary trend is negative.

However, the chart also holds out the possibility that the index may be in the terminal phase of forming a massive base.

If that is so, we would expect to see false moving average crossovers in both directions, so moving average crossovers wouldn't really mean that much.

Click here for larger image.

Source: Pring.com

The chart below shows that a head-and-shoulders top could have been forming. However, the KST is positive and the index has broken above the line joining the head with the potential right shoulder. Usually when a pattern like this fails, it is followed by a very powerful advance as those who are bullish buy. By the same token, those who were positioned on the bearish side rush to unwind these positions.

Click here for larger image.

Source: Pring.com

Also, take a look at the diffusion indicator in the second panel. This series measures the percentage of a basket of cross currencies that are in a positive trend. The green arrows show when the index has reversed from an oversold level that this has typically been followed by a rally. In the last few sessions, another buy signal has been triggered. All of these reversals suggest a test of the 12-month moving average at 88.1 and the 65-week exponential moving average at 87.3 are likely possibilities.

I can't say for sure that the dollar is going to complete the big base, but I can say that the odds favor a challenge of its upper regions.

There are some contrary grounds for forecasting a dollar rally. Cover stories often provide an important clue. At the bear market low in December 2004, there was one in the Economist on the "Disappearing Dollar"; in March 2005, Newsweek ran a cover story on the "Shrinking Dollar." A couple of weeks ago Futures Magazine asked, "How low can the dollar go?" Usually when the question is not whether, but when and by how much, it's time for a turn. I rest my case.

Down With the Canadian Dollar

For the last eight years, the Canadian dollar has traded like a commodity. As the chart below shows, the CRB has already violated its bull market trend line and the Canadian dollar is right at its line. The KST looks like it could teeter over at any time.

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Source: Pring.com

The chart below shows that the more sensitive long-term KST in the bottom panel is declining slightly along with the intermediate series. The short-term KST has started to hook down, but it's not yet bearish. This could be the beginning of a greater decline, especially as the short-term series has been diverging consistently with the currency for a long time.

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Source: Pring.com

We need a confirmation of these divergences, and that's likely to come at the trend line at 88.4c, as we can see on the chart below.

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Source: Pring.com

I think there's going to be a break soon because the next chart shows that the Canadian dollar completed a three-bar weekly reversal last week.

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Source: Pring.com

Three-bar patterns are formed when the price rallies sharply on the first bar and closes near the high. The second is a do-nothing bar, where buyers and sellers are evenly matched, and the third bar places the sellers firmly in control, with a sharp decline taking the price close to where it began. These patterns have an effect for five to 10 bars, which means that if the formation is valid, a break of the trend line is very likely.

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At the time of publication, Pring had short positions in the Canadian dollar, euro and yen, though holdings can change at any time.

Pring is president of pring.com, and is actively involved in Pring Turner Capital Group, a money management firm. He also publishes the monthly market letter "Intermarket Review." Pring is the author of several books, including Technical Analysis Explained, and numerous educational, interactive CDs. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Pring appreciates your feedback; click here to send him an email.

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