A yearly look at DXY, Interest rates, and Velocity of Money

When it comes to charting and technical analysis in the modern era I think this might be one of the most important charts of all time. There is a decades long falling wedge structure that quite frankly began before I was born. Falling Wedges are normally very unreliable in reaching target but the longer term they are the more likely they are to make it to target. When it comes to fractals they often show up as components of higher time frame W,M or triangle patterns.

DXY has clearly broken out. It spent between 2016 and 2018 testing the wedge resistance as support and has some nice structure that we can look at on the lower time frames. On the main chart I have visualized the MACD EMAs and price action to be used in conjunction with the MACD itself. The EMAs are on the verge of crossing and depending on how well the year goes may have a close with a cross. This would mean the that for the first time in several generations the momentum on the DXY would have been net positive on the yearly time frame. It will be even more bullish for the dollar if/when the signal line crosses the zero line.

Also on the chart is the Volatility stop. That lets us know with some auto-charting that we can't mess up that the price action has flipped to bullish as we price overcame the bearish volatility limits defined by the bearish VSTOP in 2016. The last bearish VSTOP level was roughly between 102.7 and 101.76. Working with the VSTOP as it gaps and flips is like a lot of TA, part science and part art and prone to letting you see things that may or not be there. One thing I do is look at the flat areas pf VSTOPs as potential range of resistance that are easier to chart due to the VSTOP behavior. As the chart below shows the yearly VSTOP range defined by the yearly VSTOP on the flats acted as resistance on the monthly time frame with no candle closes above the area. So at this point I suspect that VSTOP range will be a significant range for quite a while and may be flipped from resistance to support before a DXY Uptrend can continue. Also, the red zone is where the yearly candle wicks exist when shown on the monthly chart. There is a fair chance that while there may be some wicks above there on the monthly time frame over the next couple of years the candle bodies will be within or below that resistance range.

The main chart shows that the fib retracement from the second touch of wedge resistance to the third touch of the base, shown with the bolded black lines, has been important on the log scale. Which is important because most people don't use the log scale for DXY. There was a lot of wicking between 2010 and 2015 at the 0.236 level of 80.260 and when price broke out it got wicked right to the 0.618 level of 98.555. The ultimate targets for this formation are going to be between the 1.414 and 1.618 levels. I do think it is remarkable that the candle body of 1984 closed so closely to the 1.414 fib level shown.

And speaking of remarkable coincidences the red zone of resistance I identified from the basic candle wick analysis is right at the 0.618 retracement of DXY from high to low.

The amazing thing is I could be watching this pattern develop my whole life. It might make a decades long W pattern and retest the 70.689 level 20 years from now and when I am over 100 years old DXY W pattern could be performing at 275.

Below is the effective federal funds rate. It is also in a wedge. Since oil futures went negative a while ago and there are lots of negative interest rates around I had to do preparations for scenarios where the fed funds rate went negative. Since that has not happened the next thought is this wedge structure will perform and interest rates will be at the yearly VSTOP again here shortly (speaking in yearly terms relative to the length of the wedge, which began really in the mid 1970s.

Here is another oddity. I have the velocity of money (M2) here on the weekly time frame and it seems that it played out a perfect bull trap. I have a fib extension and somehow we see consolidations at key targets for ABC corrections. With interest rates on the rise, dxy on the rise and velocity of money over performing to the downside and reaching a major target any contraction of the money supply is going to have outsized responses to the broader economy.

Speculating what is going to happen to different asset classes is a bit beyond the scope of this post so I will link some ideas of where I think Bitcoin and equities are likely to go as well as some other post that interest me. In general: lots of things are at upside targets and showing topping behavior. If you can't eat it it is likely to be sold off.