Chartwatchers: The Future of the US Dollar

I have written here previously that I believe the US dollar, as measured by the US Dollar Index, is the key to understanding the currents of the stock and commodity markets. Typically, stocks and commodities trade inversely to the dollar. This has not been the case, however, for the broad US stock market for the past six months.

Look at the move in the S&P 500 since early October:

The NASDAQ has been an even better performer, led by none other than Apple:

The performance of Apple has been stunning to watch. Clearly it has buoyed the market as a whole since late November. I think it is important to note that Apple makes up slightly less than 4% of S&P 500, and is the largest component of the index. Moreover, it makes up 16.74% the NASDAQ 100 and is the largest component of this index as well. These figures came from an article on the NASDAQ website from about a month ago. The author, like myself and many others, was alarmed by the bearish engulfing reversal candle on February 15th. It was natural to think this was the end of a parabolic move and that the $500.00 price might form a resistance area for Apple. I suppose since many noticed the price action that day and wondered aloud about it, that it shouldn't come as a surprise that Apple powered through that price like a hot knife through butter. It touched $600.01 this past week. Does the parabolic end here? Who knows. If so, I think the broader markets will suffer as well. Apple has a major announcement tomorrow regarding its huge cash position. It will be fascinating to see the market react to this event.

Perhaps more importantly, the economic outlook has gotten better in recent months: improved jobs data, rising retails sales (Apple effect?), increases in housing construction, expanding consumer credit and enhanced clarity for the largest financials. Ryan Puplava goes on in greater detail in an excellent piece this week.

Meanwhile, and somewhat surprisingly, the US Dollar index has risen during the past six months as well:

Perhaps the strength in the index is merely a reflection of uncertainty and risk market participant see in the Eurozone. Additionally, the Bank of Japan has eased by ¥15 trillion, finally getting some traction to the downside on the Yen. Sweden, Norway and Australia have also cut interest rates in the past six months. I can go but I think the point is clear: the currency war is in full swing and right now the dollar is appreciating (losing). From a fundamental perspective, the Fed has repeatedly stated that short term interest rates will remain at 0 until 2014. The Federal budget deficit for February was $231.68 billion, up $9 billion from the previous year. The dollar isn't strong at all in my opinion, but the fact is that central banks around the world are loosening monetary policy as well. I expect our central bank to retaliate and ultimately the US may very will 'win' this war, and so perhaps QE3 (or however they term it) is now close at hand.

I've discussed ad nauseum about the importance of the 78.50-78.70 price level for the $DXY. For the past 7 weeks, the dollar has held above it. It has really struggled to hold above 80.00, however.

In addition to the chart above, I'll show a monthly chart as well:

Over this past weekend, Jim Puplava interviewed Quint Tatro on the Financial Sense Newshour. Quint is positive on the dollar and had the following to say:

"I do think the dollar is sort of bottomed, has bottomed, from a longer term perspective. I think it will the currency of choice, the fiat currency of choice, going forward. But again, its gonna be a move that transpires, like a turtle, slowly."

Looking at the chart above, I think Quint has a point. This past week the dollar index traded at prices seen in November of 2004! The MACD is rising and forming positive divergence. It is not hard to look at that chart and see a base there. From my own technical perspective, I find it interesting that the 55 month moving average for the index is 78.59, right in the area I have been emphasizing on the weekly view. There are precious few monthly closes above this moving average since the second quarter of 2002 -- and they all coincided with the credit crisis of 2008 or the European sovereign debt crisis(es).

I have respect for Quint as a trader and also as someone who isn't afraid to express views that are uncommon or unpopular. Certainly, a long term bottom and base for the dollar is not an opinion held by many in the circles that I follow. If Quint is correct, the dollar should hold the 78.50 level and continue to grind higher. He stated that he is accumulating the dollar ETF, UUP.

I think we are near a major inflection point for the dollar. I think there will be further easing this year and the currency war will rage on, with further exchange rate weakness for the dollar against the Euro, despite its problems. When that 78.50 level is lost, I expect the dollar to enter a new downtrend out of this seven year consolidation period.

I'll leave you with this brief clip of Kyle Bass discussing the dollar: