SMP99

Multi Year Dollar Rally Ahead

INDEX:DXY   U.S. Dollar Index
dxy
Charted above is the monthly US dollar index             . Some things to note about the chart:

1) The index is currently sitting right below a downward trend line going back to the 1985 high (white line). It has yet to break this trend on a closing monthly basis.

2) The current level is also sitting on the 38.2% re-tracement of the 2001 to 2008 decline.

3) And finally, current levels are sitting right below a trend line (blue) that has been important since the 1970's.

4) Monthly RSI is sitting near 72, and in order to break out above the resistance levels noted above, possible a period of consolidation (weeks/month) or short counter trend rally is due. However the previous two larger rallies that took the index above the middle blue trend line both started with overbought monthly RSI's. Breaking this trend in both instances lead to long multi year (3-4) rallies for the index.

5) Extending the upper blue trend line give us a possible target for what could be the next multi year rally in the index. Those targets if followed similar time paths of previous rallies would put the index somewhere around 110-112 in late 2017 to mid 2018.

Summary:

Short term consolidation on a daily or weekly level seems likely. Longer term, a break out above the middle blue trend line could lead to a 3-4 yr rally taking the index from 90 to 110. Or about 20-25% higher levels.
I have it closing above and then re-testing both the 1985 and 2005 trendlines already - this move is in progress now
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This is the most convincing chart on USD I've seen so far. With Abenomics and the carry trade set to continue, if Draghi begins QE then this has to be the nail in the coffin of every US priced commodity for the near future - I can't see how WTI and Gold aren't looking significantly lower in the short term until inflation returns and/or the inevitable debt defaults begin.
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SMP99 PRO neilstansbury
Thanks nellstansbury. We have the near opposite environment that allowed the 2001-2008 commodities run. A strong dollar won't preclude any commodity rallies from occurring but surely will be a strong headwind. I'm also wondering if the shift to commodities as an asset class is being unwound, a secular change. If so, money leaving commodities now is not likely to quickly return. Seems likely oil will trade sideways for some time, maybe a $40-$70 range, versus 2009-2011 where the previous collapse recovered relatively quickly.
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great insight and write, and I concur! Think KING DOLLAR is here to stay for a while. The macro problems facing the EU and other large economies are not ephemeral and will not correct overnight.

EU has to devalue to spur growth and make their bonds attractive to the int'l market, Japan has both a huge demographic problem and debt problem, and by comparison, USD is best house in a bad neighborhood.
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SMP99 PRO SPYderCrusher
Thanks for the comments. And I agree, USD is looking far more attractive than any current alternative. I suspect the EU will have to get worse before any agreement on significant bond purchases. Counter trend rallies aside , dollar looks well positioned here for the next few years
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Once it breaks the multi-year resistance, anything is possible :-)
Fed playing with Symmetry, Amen
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