Opportunity Identified

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| Posted by , Head of Investment Research

This Important Piece Of The Market Puzzle Will Impact Your Portfolio

Back in February, we highlighted some important developments which could impact the months ahead. One of those developments was the consolidation of the U.S. Dollar.  Back then, we wrote:

Another important development is the consolidation of the U.S. Dollar… the US Dollar broke out above previous resistance in the 4th quarter of 2016. On the daily chart of the U.S. Dollar, we’re compressing between $99 and $101. A break above the upper green trendline would signify a resumption of the uptrend started in 2014. And if price moves below $100, there is no reason to own the greenback. If the Dollar moves down through this important level, we could have a false move on our hands…

Here’s the U.S. Dollar back on February 27th:

US Dollar Daily Chart

The power of using price charts is we can identify where demand and supply dynamics change and use these levels to manage risk, the most important part of being a market participant. We identified the $99-100 level as important support. Here’s the updated chart:

US Dollar Daily Chart Updated

While recording new highs in early January, the U.S. Dollar Index was also logging lower highs in 14-Period RSI (our favorite momentum indicator). New highs and lagging momentum can sometimes signal limited upside continuation. In this case, the divergence in momentum was an important tell for the demand of U.S. Dollars. This was confirmed when buyers could not keep the Greenback from breaking $99, a significant level over the past 2.5 years. You can see this important level better when we step back to a bigger picture timeframe. It’s always important to look at the bigger picture. Here’s the weekly chart of the U.S. Dollar Index dating back to 2010:

U.S. Dollar Weekly Chart

The importance of the $99-100 level can be clearly seen. Sellers showed up twice at that level in 2015 making the breakout at the end of 2016 notable. However, since the highs in January, selling pressure has returned. The increase in supply has created a false move. From false moves come fast moves in the opposite direction. The fast move in the opposite direction is taking place right now. We don’t need to predict. Price shows us there’s no need to be a buyer of U.S. Dollars right now.

In conclusion, the Almighty Dollar, an important piece of the market puzzle, needs to prove itself before we’d consider a long position. If the selling continues, we’d expect buyers to show up near the $92-93 handle, an area where they showed up in the past (see green annotated arrows in the chart above). Since many market pieces are priced in Dollars, this current move could have an impact across a variety of assets, including commodities and foreign equity markets.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

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Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

| Posted by , Head of Investment Research

U.S. Dollar Needs Buyers

Those who follow our work know we are ambassadors of patience, risk management, and high probability asymmetric risk/reward scenarios. Simply put, we like to minimize losses while maximizing gains. Related to our top-down approach, we have been known to tell our readers that “cash is a position too.” When reviewing the cash position, we like to study the U.S. Dollar Index (USDX). The U.S. Dollar Index is our proxy for the value of the U.S. dollar. This index uses a weighted mean of the dollar’s value relative to other select currencies. When USDX rises, it indicates U.S. dollar strength and when it falls, U.S. dollar weakness. (If we ever want to take advantage of an appreciating dollar, we can use ETFs such as UUP to capture that move.)

As we’ve highlighted in the past, using a big picture perspective, the world’s most important currency has broken out of a 30 year downtrend:

US Dollar Long Term Chart

Looking closer, we can see the USDX has been trading sideways for over a year. In addition, we can quickly identify U.S. dollars have been outperforming an investor favorite, the S&P 500, for almost 1.5 years. And you thought “cash is a position too” couldn’t be an appropriate investment strategy? Well, if cash is outperforming stocks, we would say it is the preferred position. That being said, back in March this dynamic changed. The U.S. dollar began underperforming U.S. stocks.  Which brings us to today. The USDX is now at an important price point. What happens at this level will impact many markets and asset classes. Accordingly, we want to pay close attention to this development.

U.S. Dollar Chart

Since early 2015, sellers have shown up at the $100.00 level and buyers have stepped in at the $93.00 level. Today, we’re near that very important $93.00 level again. Will buyers step in for the sixth time in 1.5 years? Time will tell, but the bullish falling wedge (annotated in orange) is a promising development for those who want to see USDX move up from here. However, on the flip side, there is nothing more bearish than a failed bullish pattern. If the U.S. dollar drops (or pops and drops) from this pattern, it is a bearish tell.

The line in the sand is $93.00. If USDX were to break below that level, it likely would mean a trip to $87.00 and have a major impact on various markets and asset groups. We like it above $93.00. Below that, someone else can have it.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.