Bearish Dollar Signals

The dollar broke through the support level of 79 on friday as gold hit $1300 and silver closed at $21.46. This next chart is a technical analysis of the dollar index which shows some very bearish signs.

The classic shoulder head shoulder pattern appears twice here in the last year. The first time being between April and July, the second time is between August and now. The first shoulder head shoulder pattern was followed by a big bear move as the USDX lost about 7 points in about a month and a half. This current shoulder head shoulder pattern is not a large but we are in the final stages of it and keeping the move in commodities in mind, it looks like we could hit 77.50 in the next few weeks, according to the inverse of the head.

Another indicator is where the MACD starts to decline. Notice how the MACD and 9 day EMA move downward before the real selloff and don’t return to zero until roughly two months after initially declining. Interestingly enough, when it does return to zero, it does so in the process of forming the next shoulder and head. Now it is falling again and has formed the second shoulder.

Two more very bearish signals include the slow stochastics and the 50 and 200 day MA’s. The 50 and 200 day moving averages are just beginning to turn downward and the 50 day is a trading sessions work away from crossing the 200 on the downturn.

The slow stochastics again use the last shoulder head shoulder pattern to forecast the one of the present. Looking at the stochastics, starting at the top of the first head, we can see an overbought signal when the index passed the 87.50 mark. Two months later during the second and most recent head, it crossed overbought territory at just above the 82.50 level. In other words, overbought territory is now a whole five points lower than before. Technically the dollar is in oversold territory but again using the first model, it entered oversold territory multiple times and continued to selloff without putting up a fight.

Combine all of this with the fact that a new week is about to start, and I would say that this is a short dollar, long commodities opportunity. Go ahead and call me a broken record. ;)

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Bearish Dollar Signals

  1. Pingback: 10/5/10 Markets, Dollar Index, Great Panther Mining « Aaron Basile

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