March 1, 2010: The bearish dollar “experts” have disappeared. Where are they now? They were extremely bearish in November 2009, when we were turning bullish. So may we say, “we told you so.”
It was very fashionable to beat up the Dollar and the US economy when the currency was down. Now the dollar rally will soon make it fashionable to talk up the currency and the resilience of the “greatest country” of the world. The expert opinion is not always helpful. So let’s tune out the noise and let the market and its price action guide us.
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The dollar index has been range bound for quite sometime now as we had predicted in this report (Dollar index hits congestion) but seems to have room to the upside based on technical patterns.
We had cautioned our readers that the downtrend in the dollar was ending ( Caution warranted for spot dollar bears) in November and the currency rallied after bouncing off support. On its run up the dollar index formed an inverse head and shoulders pattern, which is a bullish technical formation that can take the dollar index up to 83.
A look at the chart below shows the head and shoulders on the chart. It also shows measured move in white vertical lines. Traditional technical analysis states that if prices break the neckline of a head and shoulders pattern, it will make the measured move. The measured move is the distance from the head to the neckline, which is then applied to the point where prices break above the neckline. The chart below shows that the index should reach 83 based on the measured move.
Also notice that 83 is an area of previous resistance, from where prices fell. It’s possible for the index to reach that area and correct. Take a look at the 50 and 200 exponential moving averages, which have crossed over. This is called the golden cross, which is also a bullish signal.
However, for the index to reach 83, it has to clear area marked by the red box. As mentioned in our earlier report, the area of the red box is an area of congestion. Prices stayed there for quite sometime before falling in 2009 and may stay there a while now. Once the index clears the area in the red box, it can head higher.
To predict the future direction on the index, we’d wait to see its reaction in the 83 area. The dollar’s outlook over the next several years is still bearish. But remember market does not travel as the crow flies. It has its ups and downs during a major trend and current rally may just be a correction before downtrend continues.
