Don’t sleep on the dollar!

I just wanted to do a follow up on the US dollar. In the past, I have analyzed the dollar to gauge the possible movement in various markets. Not only can the movement of the dollar warn us of potential moves in commodities, stocks and bonds, but also trading the dollar itself can be an option.

So, let’s review an updated, long-term chart of the DXY dollar index.

As you can see, the DXY has created a long-term support line that accurately gave the dollar a bounce back in November. Here recently, the dollar approached that same trend line. Although the dollar may have already tested this trend line and begun a move higher, watch to see if it is tested again soon. If so, I would obviously expect the bounce higher for the dollar at that time. This could be a negative for commodities such as gold and other currencies such as the euro. A bounce in the dollar might be problematic for stocks as well.

Lastly, don’t assume the DXY will hold that support line. What if it breaks rather than provides a bounce? That could be a positive for gold, the euro and stocks.

The Tale of the Tape: The DXY may have tested its long-term support and started to move higher. On a move higher, expect the exchange trade fund (ETF) UUP to rise as well, while the ETF FXE would move lower. Protect any positions in gold if you haven’t already. On a DXY break of support, look to go long on commodities like gold, currencies like the euro, and possibly stocks as well.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT