Thursday, January 10, 2008

Is The U.S. Dollar Forming A Major Bottom?



Above is a weekly chart of the U.S. Dollar (green bars) along with a proprietary indicator (white line) that I use which leads the US. Dollar.
As you can see the Dollar has been in a downtrend for the past two years but I think that will soon change.

First I'd like to talk about a simple trading tool that I use which is called a 1-2-3 formation. Some people call them hooks or Ross hooks or first higher low or first lower high, but I will keep it simple and call it a 1-2-3 formation.

You'll notice in the above chart there are three 1-2-3 formations which did an excellent job at identifying a major low and high. The first formation took place at the beginning of 2005 and that kicked off a major rally. The next 1-2-3 formation developed at the beginning of 2006 and that triggered a major top. Here we are at the beginning of 2008 and we see a 1-2-3 formation taking place once again at the beginning of the year. Just based on this formation alone I would be looking to become bullish on the dollar if point 2 was taken out, but I have an additional reason to be bullish on the dollar.

In white is a leading indicator that I use which has done an excellent job at leading the Dollar by about 7 months. If you think about it, that's pretty amazing. Notice how many of the turning points in the Dollar followed the white line. Keep in mind these turning points were known 7 months in advance.

As of right now you can see that this leading indicator is trending higher which indicates to me that the U.S. Dollar should begin an uptrend very soon. The way I would trade this is that I'd wait for the Dollar to take out point 2 and then I'd get long. My protective stop would be right below point 3 which is still in the process of forming.

Once again, there are no crystal balls and nobody knows what the future may hold so trade smart and use stops and most of all never argue with the market.

9 comments:

boulderbob said...

If one does not trade currency furtures what vechicle can be used to take advantage of this. Is there an ETF or other means?

Joe said...

Kevin,

The gold and US$ markets seem pretty much correlated. This would strengthen your case for both lower gold price and higher US$. My LT models signal the same major trend changes, and lasting for a long time.
Do you see any correlation to the stock market? - My models tell me that along with the two mentioned changes, the US stock market will take off majorly around late January as well.

Thanks, Joe

JBetz said...

Boulderbob -

I don't mean to butt in, but one idea for trading the dollar from a bullish perspective is the Rydex Strengthening Dollar 2x Strategy Fund (RYSJX). The opposite of this position is the RYWJX (weakening 2x). I'm not aware of any ETFs, however, based entirely on the dollar index.

Lexical Disambiguation said...

boulderbob - the ETF is UUP (PowerShares Bullish U.S. Dollar Index Fund) There is also UDN - bearish version. These ETFs are relatively new and have fairly light volume compared to the popular ETFs.

benjamin_ng said...

Hi Kevin,

Thanks for the USD chart. My indicators are looking for something similar. I think there is too much public bearish sentiment and COT commercials are shorting gold, and foreign currencies like crazy.

Could you please continue to post your leading indicator chart every few months if it is convenient.

I really appreciate you sharing you work.

Good luck,

BXhype said...

By looking at the fundamentals, you might be able to deduce some good ideas for country specific bets. For example, USD-GBP (FXB) is probably a good candidate to get long, same with USD-EUR (FXE) and USD-CAD (FXC). However, if we continue to see turmoil in the US equity market, USD-JPY (FXY) may not be the best place to be. Also, some people view the yen to be a proxy for Asian developing currencies (ie Chinese yuan), which ,as I think most people agree, will continue to appreciate against the USD, albeit very slowly.

grizz003 said...

I don't understand. What could cause such a huge rally in the Dollar in view of plunging US Debts, rocketing trade imbalances, massive increases in the money supply? Everything I look at suggests a plunging dollar.

What am I missing?

Thanks, Fred

moo said...

Kevin,

I wouldn't bet the farm on that white line Kevin. Remember, every indicator and "signal" has trouble in extreme conditions and so it would not surprise me if this white propriety signal may be misleading. Do you know how the white line indicator is composed? Can you back test it under the extremes of 1974-1976? That would be an interesting test to prove its integrity.

Given the current environment, the fundamentals suggest a continuing lower dollar (along with a few bull burps here and there).

Andrei said...

I agree somewhat with moo. In two weeks when the Fed drops rates, I dont think that the dollar will rally... that is unless traders price the drop 25-50 bps in. The EU also supports holding their own rates steady to fight inflation. Always need two sides to a market, so place your bets. :-)

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