Key Technical Pattern Failure Saves the Dollar

The next move for the U.S. dollar (and your net worth) is surprising.

The last 15 years have been destructive for the U.S. dollar.

Trillions in new debt. A genuine credit crisis. Consistent economic stagnation.

The only real strong point for the U.S. dollar is that its competitors — all other major currencies — are in even worse shape.

Comparatively, the U.S. dollar is strong. But it has hit a major turning point that’s going to have a great effect on your wealth, comfort, and retirement in the months and years ahead.

Dollar At Turning Point

The dollar has been steady for the last few years. It traded sideways for the better part of two years.

Then it all changed and the U.S. dollar suddenly rocketed higher bucking all the top forecasts.

Many macro level points have been made to explain the strength of the dollar.

Coming out of the 2008 recession, the United States economy has been perceived as one that set the stage for growth where other nations instituted austerity measures during sensitive times, crippling recovery efforts in those parts of the globe.

At the end of the day, people decided it was time to flock to “safe haven” investments. And having USD in hand allows for maximum flexibility and diversification away from risk.

A lot has changed since then.

More recently, the U.S. gross domestic product leaped at a five percent pace between July and September last year. It was the fastest period of annual growth in over a decade.

Another factor has been oil. It has helped boost the value of the dollar. Domestic supply is up and fewer dollars are shipped overseas to buy oil.

Perhaps one of the largest driving forces behind the dollar’s rebound can be seen at the U.S. Federal Reserve.

Quantitative easing — the printing of and handing out of trillions of dollars — is poised to slow as the economy strengthens without the need for a proverbial crutch.

And the list of points goes on and on…

Let’s take a chartist’s look at the US Dollar Index which measures the value of the dollar relative to a basket of foreign currencies.

Dollar Index Head-and-Shoulders Failure
U.S. Dollar Index DXY 300x275 - Key Technical Pattern Failure Saves the Dollar

The Dollar Index may look like random zigzagging lines to the untrained eye, but one important technical pattern leaps right off the page.

It’s a common setup known as the head-and-shoulders pattern. And it’s believed to be one of the most historically reliable trend-topping patterns you can bank your money on.

The all too important “neckline” is plotted just below price to show points where the index found bullish support and reversed the trend preceding it.

The neckline in this type of formation was supposed to eventually crumble and give way to additional downside pressures.

But it didn’t…

In this example, we have a confirmed pattern failure as price refused to decline below $70 per share around the time of the U.S. equity market collapse in 2008. Instead, things became a bit choppy through a consolidation phase where the final clash took place to decide the ultimate trajectory of the index – one the bulls would eventually win.

In the six years following the March 2009 market bottom, many bullish advances were held in check, unable to reach the effort before it. While that might seem like a bearish development, it turned out to be just the opposite. In reality, it enabled longs to build a case and some momentum behind the curtain. For the many reasons listed initially above, the price simply could not be held in check any further.

And like a volcano with building pressure from within, it unleashed fury to the upside, climbing from about $82.50 up to $94.33 in five short months. While a 14.3% move higher from breakout may not seem like much, it is significant when you consider that the index itself is weighted from a select group of developed country currencies:

-Euro (EUR), 57.6% weight
-Japanese yen (JPY) 13.6% weight
-Pound sterling (GBP), 11.9% weight
-Canadian dollar (CAD), 9.1% weight
-Swedish krona (SEK), 4.2% weight
-Swiss franc (CHF) 3.6% weight

So what happens next?

While I believe the longer-term move continues to be bullish, there is likely to be a retracement in the coming months to secure the gains and establish a new stable price platform from which future gains can be made.

As long as price does not decline below $81 over the next few years, which is approximately where the declining support line will exist, there should be no reason to pull the ejection handle.

And what does all this mean for you?!

As a sign that the underlying U.S. economy is on the right path and outperforming competitors abroad, there are a few key benefits. Your hard earned dollars will go further when traveling overseas – think of the savings in booking that next vacation. Or maybe you’re in the business of importing goods and can appreciate lowered cost. Reduced energy costs here at home would also mean less pain at the gas pump – what’s not to love there!

But when it comes to stocks, those companies which derive a majority of their revenues domestically will see a big boost as they can avoid the hit of having to exchange foreign profits into USD. So there should be some nice wealth-building opportunities in the small-mid cap stock range where operations have yet to expand beyond the border in any meaningful way. Think about biting into shares of regional banks, utilities, homebuilders, drug store operators, general retailers and even some insurers.

As always, we’ll check back in when a new development occurs. So stay tuned…

Good investing,
Reflex Investor

P.S. Check out our comprehensive financial newsletter, Reflex Momentum Report. It uncovers “under the radar” investment opportunities, marrying fundamental quality with critically important technical timing to enhance potential returns.

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