Dollar, Euro, Gold Update

Dollar Update

The January 2 Profit Radar Report published this chart and long-term US Dollar Index forecast:

The US Dollar Index could be at or near the end of a 5 ½ year rally. As per Elliott Wave Theory, it is possible to count 5 waves up from the May 2011 low. There are bearish divergences at the December highs, and investor sentiment is in favor of a lower dollar. We are alert for a potential multi-month US dollar decline.”

As it turns out, the US Dollar Index actually peaked on January 3, and spent the next 8 months falling lower.

In August/September we were expecting a bottom, but at the time we were not sure how big of a bounce to expect.

In November it became clear that the rally from the September 8 low to the October 27 high was only 3 waves, a first indication that the dollar bounce was over (a 5-wave move higher would have marked a trend change according to Elliott Wave Theory).

The chart below reflects the most likely Elliott Wave Theory count, which projects a more significant low in early 2018.

Smart money dollar hedgers are near record long the dollar, which could lead to a more sustainable rally even before the dollar reaches new lows (a solid close above 95 prior to a new low would suggest that the wave 5 low is already in).

However, hedgers are often early and may become even more bullish in the coming weeks. The lower the dollar falls, the better the buy signal.

Corresponding long dollar ETF: PowerShares DB US Dollar Bullish Fund (UUP)

EUR/USD (Euro)

The euro (EUR/USD) generally moves in the opposite direction of the dollar.

Since the above dollar analysis provides a multi-month forecast, we’ll use the EUR/USD for a short-term outlook.

On November 14, the EUR/USD broke above the black trend channel, and re-tested that channel on November 21 (blue circle).

The November 20 Profit Radar Report said that: “The EUR/USD is near support around 1.17. This could serve as springboard for new recovery highs.”

We now expect a rally above 1.21. The gray trend channel provides some short-term support/resistance levels. Trade should not drop below 1.17.

RSI appears unlikely to confirm new highs above 1.21, which would harmonize nicely with our expectation of a larger pullback.

Smart money euro hedgers, however, are nearly record short the euro, which will draw the euro down eventually. We’d love an opportunity to short the euro above 1.21 against a bearish RSI divergence.

Corresponding inverse euro ETF: ProShares UltraShort Euro (EUO)

Corresponding euro ETF: CurrencyShares Euro Trust (FXE)

Gold

This September 28 article included a detailed long-term outlook for gold.

The October 4 Profit Radar Report said all there was to know about gold for the weeks to come: “Support for gold is at 1,245 – 1,260. Resistance is at 1,298 – 1,304. For now, gold is likely to trade between support and resistance.”

Gold is pushing the upper boundary of the outlined trading range, but thus far there’s been no breakout. Silver failed to confirm gold’s push higher, which can be a warning signal. On balance volume has been increasing, which is a positive. Nevertheless, we would view a break above 1,307 with suspicion.

Corresponding gold ETFs:
SPDR Gold Trust (GLD)
iShares Gold Trust (IAU)

Corresponding inverse gold ETFs:
ProShares UltraShort Gold (GLL)

Continued forecasts for the US Dollar, EUR/USD, gold and silver are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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Did the U.S. Dollar Put in a Permanent Low?

Last week saw the wildest U.S. dollar and euro currency swings in quite a while. The U.S. dollar index fell to new lows, the euro spiked to new highs. Both reversed violently thereafter. Is this the beginning of a trend change?

For well over six months the U.S. dollar, euro, and EUR/USD have been trading in a frustratingly tight range, but last week saw some noteworthy action.

On May 8, the U.S. dollar index traded below 18-month support (blue circle) at 79.

Based solely on technicals, the May 8 dip should have led to more selling.

However, the May 7 Profit Radar Report, which recommended a small long U.S. dollar position earlier, outlined why a dip below 79 might be a bear trap:

The U.S. dollar is teetering just above important support at 79. Based solely on technicals, a drop below 79 would be a sell signal and unlock a target around 76. However, a drop below 79 could also turn into a bear trap. Here’s why:

There is generally an inverse relationship between the dollar and U.S. stocks. Although this relationship comes and goes, the seasonal pressure on stocks should be positive for the dollar (more details on stock seasonality below).

Euro cycles will soon turn temporarily bearish.

Euro is close to up side target at 1.40.”

No doubt the quick headfake below 79 triggered an avalanche of stop orders, which fueled the vigorous rally since. The corresponding U.S. dollar ETF is the PowerShares DB US Dollar Bullish ETF (NYSEArca: UUP).

As mentioned in the May 7 Profit Radar Report, one of the reasons the dollar down side was limited, is because the EUR/USD was close to our up side target at 1.40.

The chart below shows EUR/USD (CCY: EUR/USD) resistance around 1.40 and a violent reversal from the 1.3992 high. The most closely correlated euro ETF is the CurrencyShares Euro Trust (NYSEArca: FXE).

Last week’s reversals may well be the beginning of a new trend, but it will take a move above short-term resistance to unlock new targets.

The May 7 Profit Radar Report also mentioned seasonal pressure for stocks. Everyone knows about the chewed-out ‘sell in May and go away’ adage.

Here is why to expect seasonal weakness for stocks, but first we’ll have to wait for all the ‘early adopters of the sell in May strategy’ to get burned. More info here:

S&P 500: 3 Reasons to Expect the May Blues … But Not Yet

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Could a Strengthening Dollar Sink Stocks?

On a walk down memory lane, we discover bold statements like this one – “Nobody wants toxic US dollar” – made in April 2011. Today the dollar trades 8% higher. In fact, the dollar is right above key support. Will it hold and potentially sink stocks?

According to analysts, the US dollar has been doomed ever since the Federal Reserve started QE back in 2008. Every new round of QE draws the dollar doomsday crowd out of their den. To wit, I’ve included a few headlines below:

April 8, 2011: Toxic Dollar: Why Nobody Wants US Currency – CNBC
June 15, 2011: Dollar Doomed to Drop – UBS Technical Analyst
July 28, 2011: U.S. Dollar Poised for a Plunge – Peter Schiff

But nearly five years later, the greenback is holding its ground.

It may not be the strongest currency of the global currency basket, but the US dollar today – and that may be hard to believe – is trading exactly where it was back in 2004 (dashed purple line).

Albeit choppy, since August 2011 the dollar has consistently climbed from higher lows to higher highs.

Connecting the recent lows creates obvious support (green trend line).

The US Dollar Index came within striking distance of this trend line last week.

Will Support Hold?

A trend line is called a trend line because it delineates a trend. In this case an up trend. The trend remains up as long as price stays above the trend line.

Being aware of such trend line support is important for at least two reasons:

1) The trend line makes it clear that the dollar is at a key inflection point. Key support is like a rung on a ladder. If the rung breaks, you fall. If support fails, the dollar falls. If support holds, the dollar should ‘climb up.’

2) Dollar strength or weakness is not just a currency story; it’s also an equity event. There is a correlation (see below) between movements of the US dollar and stocks. A US dollar rally may lead to falling stocks. Why?

A falling dollar is good for exports and corporate profits and therefore good for broad US indexes like the S&P 500 (SNP: ^GSPC). A rising dollar is generally bad for corporate US profits.

Based on my assessment, the odds of a sustained dollar rally are currently greater than the odds for a decline.

The PowerShares DB US Dollar ETF (NYSEArca: UUP) provides long US dollar exposure. If support fails, it may be time to look at the PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) or CurrencyShares Euro Trust (NYSEArca: FXE).

Exactly how strong is the correlation between stocks and the S&P 500 (NYSEArca: SPY)? Could a US dollar rally sink stocks?

This article about the US Dollar/Stock Correlation shows exactly what a strengthening dollar would mean for US stocks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

Renewed Euro Concerns May Coincide with Euro Currency Bottom

‘Bad News Europe’ is back in the headlines and the euro is trading at a three and a half month low. European contagion concerns appear to be bearish for the euro currency, but technical analysis provides a different outlook.

Negative European news just made their first media appearance of 2013 and the prospect of a Cypriot bailout sent the euro currency to the lowest level since December 10, 2012.

Renewed concerns about the euro zone sound bearish for the euro, but technical analysis suggests the euro currency is ripe for a (temporary) comeback.

The chart below tracks the euro since the July 2012 low. It also shows some of the trend lines and support/resistance levels the Profit Radar Report uses to pinpoint highs/lows and reversals.

The February 2013 high coincided exactly with parallel trend channel resistance. On January 30, the Profit Radar Report warned that: “The headwind is getting strong. A close below 1.3488 will be the first sign of an impending correction.”

This was followed up on February 3 by the observation that: “The euro spiked to the upper parallel channel on Friday, a potential stopping point for this rally.”

The euro has fallen precipitously since. Today’s drop created a green candle low which was unconfirmed by RSI – a bullish RSI divergence.

A bullish RSI divergence in itself doesn’t mean the euro won’t fall any further, but two multi-year support levels (solid and dashed green line) suggest that the down side for the euro should be limited.

The CurrencyShares Euro Trust (FXE) is a currency ETF that tracks the euro currency closely and provides easily accessible long exposure to the euro.

A word of caution, it appears that the upcoming euro rally will only retrace a portion of the previously lost points and may not reach new recovery highs.

We also note that the euro dropped to a new multi-month low, while the US dollar didn’t eclipse last weeks high. I’m not sure what this divergence means, but it’s reason to take a cautious approach.

Regardless of this divergence and the next moves longevity, simple RSI and support/resistance level analysis like this identifies low-risk trade set ups and the risk management levels needed to spot an attractive risk/reward ratio trade.

The Profit Radar Report analyzes the S&P 500, euro, dollar, gold, silver, Treasuries and other indexes/ETFs to provide low-risk and high probability trade setups.

US Dollar Rally Conflicts With US Stock Rally

Hot or cold, light or dark, black or white are common sense opposites. The US dollar and US stocks are a financial opposite, or inverse correlation. When the dollar goes up, stocks usually come down, but what happens when both go up?

2012 was a terrible year for Northern Michigan Cherry farmers. A hard freeze in late March did serious damage to the local cherry crop. What’s unusual about a hard freeze in winter?

Nothing really, and technically the freeze wasn’t the problem. It was the record-setting mid-March heat wave that coaxed out blossoms. Cherry trees started blooming when the freeze came and caused an 80-90% bud kill on Northern Michigan’s tart cherries.

Financial Climate Changes

Unprecedented climate changes are not only seen in weather patterns, they are also observed in financial patterns. The Federal Reserve’s ‘carbon footprint’ may be to blame for U.S. dollar/stock pattern shifts.

The U.S. dollar and stocks generally have an inverse teeter totter-like relationship. When the dollar goes up, stocks usually come down and vice versa.

The first chart plots the SPDR S&P 500 ETF (SPY) against the PowerShares DB US Bullish ETF (UUP). Green and red arrows are used to illustrate the inverse relationship between the S&P 500 (SPY) and the U.S. dollar (UUP).

Every green trend arrow is matched by a corresponding red trend arrow and vice versa. Since February 2013 we are seeing two green arrows as the S&P and dollar are trending up.

The second chart plots the SPY ETF against the inverse UUP to further illustrate the same point (plotting SPY against the euro or CurrencyShares Euro Trust – FXE – would yield similar results).

What Does This Mean?

UUP is about to run into resistance around 22.7 (the equivalent for the U.S. Dollar Index is 82.8 – 83.6). This is illustrated by the red range in the first chart. After a strong rally, the U.S. dollar is due for a breather.

The S&P 500 is not far away from an inverse head-and shoulders target around 1,565 in the all-time high at 1,576. This is strong resistance and should lead to some weakness, possibly even a larger reversal.

However, a falling dollar and declining stocks would still be contrary to the normal inverse correlation between stocks and the dollar.

This doesn’t mean it can’t happen, but it’s a missing piece to get a high probability signal (sell for stocks, buy for dollar). When historic correlations disagree with an overall decent trading opportunity, it’s prudent to be nimble and keep a tight leash on your positions.