[Chart Of The Week] Is This US Dollar Breakout The Real Thing?

JC Parets
December 2, 2016

I like to keep an open mind. The one thing I'm certain of is that I'm not certain of anything. So I weigh all of the evidence and then try to find the best risk vs reward opportunities based on the cards that we've been dealt. We can't let our emotions impact our decision making, it has to be 100% dependent on the data at hand. Today, I think one of the more interesting situations is in the US Dollar Index.

First, let's rewind a little bit. In March of 2015, we saw the most bullish sentiment towards the US Dollar that we've ever seen on record (see here: Some Thoughts On The US Dollar). It should be no surprise that we have seen the US Dollar Index go absolutely no where ever since. It takes time for such extreme sentiment readings to unwind. Was 20 months of consolidation enough to do the trick?

Here is what the US Dollar Index looks like today. We're seeing about 20 months of sideways consolidation after the historic bullish sentiment in March last year. Is this breakout for real?

DXY1

Here's another way to look at it. I see the US Dollar Index running into the 61.8% retracement of the entire 2001-2008 decline. Wouldn't this be a logical place for a rally to take a pause?

DXY2

Meanwhile, did you see The Economist magazine cover this week?

usd3

You can't always assume the media has it wrong, even though history has proven that they are usually the most wrong at turning points. So what does the actual data show? I see the Swiss Franc with the most extreme bearish sentiment since May 2001 (a month before the US Dollar peaked and crashed for 7 years) via Sentimentrader.

The Twitterati also thinks the US Dollar rallies from here:

dx poll

Here is the Swiss Franc NOT making new lows last month when the US Dollar Index broke out to new highs:

CHFUSD

Here is the Euro also NOT making new lows last month when the US Dollar Index made a new 13-year high:

EURUSD

So let's take one last look at the US Dollar Index. Was this breakout for real? Or are we about to see a nasty mean reversion? I'd argue that if we're below 100, the latter is the higher probability outcome. So that's the level I'll be watching:


DXYfo

What do you guys think?

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Tags: $DXY $UUP $EURUSD $FXE $6E_F $FXS $CHFUSD $6S_F $DX_F

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