Beware The Dollar: It Is Not Bottoming

Is Another Rebound In Store?

Earlier this year the Dollar Index looked like it was putting in a bottom. Sadly to say, the bullish signal it was giving off turned out to be right, only for the very near-term and that was all. What happened is that the index was in downtrend, hit a support level and bounced. The difference in the signal is that yes, it was a bullish signal, but it wasn’t a sign of reversal. No, it was nothing more than a quick correction and consolidation within a bear market that led to a new chance to sell. And selling was the right thing to do. The Index confirmed resistance at a level consistent with downtrend and since broke right through support.

Now the Dollar Index is in a similar position. The index hit a bottom-like area and is now in consolidation. The question is whether or not this is really a bottom or if it is just another continuation pattern. The first clue here is that today’s trading consolidation levels are not at what I would call a support target. More likely I’d say the index is trading in a no-mans land between two strong levels. Looking back at my previous forecast, the index has only made about half the move it could make, now that support at the $95.50 level is no more.

The second clue is the outlook for economic stimulus. It is all but assured that legislators on Capital Hill will reach a deal, the only question is when. When that happens the amount of U.S. stimulus will grow by a large factor furthering downward pressure on the dollar.

On a technical basis, the index is forming a flat bottomed triangle/flag pattern within a down trend and that to me is bearish. Support is at the $92.75 level, a move below there would confirm the forecast. The indicators are currently set up in what looks like a strong bullish signal but I warn you, in the context of a bear market this set up is perfect for firing another strong bearish signal. Once price action and indicators confirm the move, traders should expect another down-leg taking the index to the $90.50 level or lower.

The risk, of course, is if the deal is not done, or if Republicans hold out long enough for the economy to not need help or Democrats cave on their demands. I doubt either of those things will happen.