Is the dollar due a massive rally?

The US dollar has been without friends for some time now. But could it be due a big rally? John C Burford looks at the charts to see what they can tell him about where the greenback might go from here.

For some time, it has been clear to me that the bullish case for commodities has been primarily a dollar story (see my recent silver post).

Just take a look at the movements in the US dollar index, which represents a basket of currencies, with the euro by far the largest component.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Could we see a shock dollar rally?

SB00088-01

(Click on the chart for a larger version)

The dollar has had some wild swings in recent months. From the 70 low in the summer of 2008, it rallied to 90 in early 2009 (a gain of 28%), and then fell back to 73 (a loss of 19%).

Advertisement
Advertisement - Article continues below

It then rallied to 89 in the summer of 2010 (a gain of 22%), and has recently fallen to 72 ( a loss of 19%).

And currently, it has few friends. You will have to search pretty hard to find recent bullish articles on the greenback. The nightmare scenarios of waves of quantitative easing money-printing and consequent hyper-inflation are all over the blogosphere and the mainstream media.

But is all this negative comment setting the stage for a dollar rally?

Big turning points are almost always made when market sentiment is very one-sided.

However, market sentiment measures are blunt instruments! You cannot use them for timing the markets without other input.

Now the dollar has retreated to the low 70s, will that level hold (again)?

Advertisement
Advertisement - Article continues below

The tramlines joining the tops and bottoms appear solid - and the latest low has hit the lower tramline - just when bullish sentiment is at a record low.

The dollar is currently bouncing off the lower tramline.

And what about the euro?

Now let's look at the euro, which is the most practical trading vehicle for spread betting.

SB00088-02

(Click on the chart for a larger version)

This daily chart shows a textbook Elliott three-wave rally pattern (with a long wave C) and the very solid tramlines. Note the upper tramline sports several exact touch-points, as does the centre one.

Advertisement
Advertisement - Article continues below

When the centre tramline was breached on 6 May, I then drew my lower tramline equidistant and parallel.

Here is a close-up:

SB00088-03

(Click on the chart for a larger version)

Notice the pull-back after breaking the central tramline to the underside of the tramline (red arrow) - and then a 'scalded cat bounce' away.

I have marked today's lowest tramline bounce by a yellow arrow.

But when the central tramline broke on 6 May, I was able to predict the likely target for the euro my lowest tramline!

Advertisement
Advertisement - Article continues below

This line was drawn equidistant and parallel to the two original tramlines on 6 May. This line was hit today, 16 May.

But that is not all. I can also draw another separate tramline set on the hourly chart:

SB00088-04

(Click on the chart for a larger version)

I have shown a close-up, but if you go to your own charting package, you will find several touch-points from previous trading.

So now I have two targets arrived at by two tramline sets both at the same price!

That point of support should be formidable.

Advertisement
Advertisement - Article continues below

So, the long-term picture is bullish for the dollar, but the short-term is bearish. In other words, a pretty normal trading situation!

Trading the markets always involves having to use incomplete and often contradictory information.

And that includes chart as well as fundamental information. You have to go with the balance of probabilities, as you see it.

But that is what makes a market a basic disagreement over the outlook for prices.

To me, if a decent euro rally does not develop from here, that may well be a signal for more selling. Meanwhile,the dollar index will catch another bid, driving the huge army of dollar bears out of the market.

NB: Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .

Advertisement

Recommended

Visit/currencies/600640/the-currencies-to-bet-on-this-year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Visit/506272/welcome-to-currency-corner-your-weekly-guide-to-the-worlds-biggest-market
Currencies

Welcome to Currency Corner – your weekly guide to the world’s biggest market

Forex is by far and away the biggest market in the world, with an average daily trading volume of over $5trn per day. Here, Dominic Frisby looks at th…
3 May 2019
Visit/502761/the-nature-of-money
Currencies

The nature of money

The best currencies are based on a strong democracy, strong institutions and a firm attachment to both the rule of law and the protection of private p…
28 Feb 2019
Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020

Most Popular

Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/economy/600875/money-minute-24-february-house-prices-unemployment-and-corporate-results
Economy

Money Minute 24 February: house prices, unemployment and corporate results

Money Minute: previewing the week's most important economic and financial goings on, including the latest house price, and unemployment figures, and …
24 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019