Top Advisors Corner

David Keller: Dialing Up the Dollar

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After spending the last 16 months in a fairly orderly downtrend, the US Dollar is showing signs of a short-term reversal.  After putting in a higher low in late March, the greenback may be poised for a return to the highs of late 2017.

While there are many macro factors that can influence the value of the dollar, an independent technical review of the chart can allow you to have a more informed discussion of what the future may hold.

Here we’ll review the weekly chart of the UUP (bullish dollar ETF) for a long-term perspective on the recent breakout, then we’ll focus on a short-term outlook using the daily chart.  

 


Since topping out in early 2017, the dollar has embarked on a consistent Dow Theory downtrend of lower lows and lower highs.  This downtrend was perhaps best represented by the dashed blue trend line which was tested and confirmed a number of times in 2017.

The first sign of a potential bottom was a bullish divergence with the price and the weekly MACD indicator.  As the dollar moved to new lows in January of this year, the MACD put in a higher low, suggesting a decrease in downside momentum.

Over the last two weeks, we have seen the RSI break above its trend line from the 2017 highs, as the dollar itself broke above the trend line we discussed earlier.  All of these signals together suggest that the long-term down move in the dollar may be exhausted.

Using the 2017 high and 2018 low, we can identify a Fibonacci retracement level around 24.50, which would line up with the high from December 2017.  This coincides to a value of around 94 on the US Dollar Index ($USD).

Switching to the daily chart, we can see more detail on the base that the dollar has been forming over the last three months.  This bottoming pattern has a 3% range from top to bottom.

A breakout of this trading range this week also pushed the price above a short-term trend line using the November and December highs.  Projecting the height of the base from the breakout point, we reach a minimum objective around 24.50, which lines up well with the Fibonacci retracement level from the weekly chart.

With any breakout, it’s important to see some sort of confirmation, usually in the form of a follow-through in price.  A break above the 200-day moving average (currently around $24) could provide enough of a confirmation to expect further upside.

If this week’s breakout should fail, the recent lows around 23.30 and 23.10 will be key support levels to watch.

David Keller, CMT 
President
Sierra Alpha Research LLC

David Keller, CMT is President of Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness.  He is a Past President of the Chartered Market Technicians Association and most recently served as a Subject Matter Expert for Behavioral Finance.  David was formerly a Managing Director of Research at Fidelity Investments in Boston as well as a technical analysis specialist for Bloomberg in New York.  You can follow his thinking at marketmisbehavior.com.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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