You have probably heard most of the fundamental arguments by now about why you should own US Dollars. The FOMC is within months to raise rates for the first time in years, yet most other central banks are either lowering rates, imposing negative deposit rates, or perhaps unleashing their own versions of quantitative easing. Perhaps you have heard that monies are coming back to the USD because the US economy is faring much better than the rest of the world. Perhaps you have heard that the Chinese, Indian and other emerging market economies growth surges of the last couple decades have started to slow. The argument points are valid. Frankly, I agree with them. The questions that many are asking is “Has the US Dollar rallied too far, too fast? Is all the good news priced in? Is the USD rally over?”

When asked these questions I have to look at the pair technically, and see if there is any historical evidence that the USD (or better known as the DXY) is ready to reverse?

Months ago we looked at the DXY as it tested a 29 year trend line, and since then it recently stopped at its 50% Fibonacci retracement. This is important since we have seen it also stopped at a 50% retracement level back in 2001 from the 1985 highs to 1992 lows.

Over the last week, it has been brought to my attention that the USD index was (again) hitting the 29 year trend line. I was perplexed at the time, but realized that chart that those people were referencing were logarithmic style price charts on the DXY. Normally, that makes sense when looking at a longer term history of a security (let’s say like MSFT, the DOW, or maybe the NASDAQ) that has been through many splits or massive percentage gains over the years. The USD index which has not seen multipliers of gains or losses over the years is best viewed from a linear (arithmetic) price chart. That is a personal preference but here is the logarithmic chart traders are looking at:

(log chart showing we are touching 29 year trend line, also testing the 50% Fibonacci level)

Here is the linear chart I have been looking at:

(linear chart showing we broke the 29 year trend line in November 2014)

Regardless of which chart you prefer to use, I think we could all agree on the fact that the USD is at a major inflection point. So the next question we have to ask is if the USD index will continue to rally or not. Looking at the daily chart I was able to find some answers.

(continuation patterns on the daily chart as RSI is back to mid point)

The last 3 legs higher (see below) have been met with an overbought Relative Strength Index (RSI) reading of above 70. When that happens, the DXY tends to consolidate as the overbought readings subside and the RSI comes back towards the midpoint (as it is now). At that point, the USD seems to make another push higher.

If the USD makes another push higher, it may be a big one. I suspect many in the trading community may be trying to fade a USD move since the consensus is that the USD long position has become overly crowded. On a breakout, that may just add fuel to the fire to the current USD rally. If the USD does push into new highs, we may breach that 50% retracement (just below 96.00) and push towards the 61.8% (or golden fib level) which is past 101.00 on the US Dollar index.

Sentiment change can be a huge shift in the market. The 29 year trend line has been broken. That’s longer than most of you have been participating in the markets, including me!

Blake Morrow

Chief Currency Strategist, Wizetrade

@pipczar

Disclaimer: I am currently long some USD’s against the AUD, NZD and CAD. I am currently seeking to add to my long USD exposure in the coming week(s)