From the Desk of Ian Culley @IanCulley
The calls for a dollar top are growing louder as analysts claim the advance is overextended.
They’re right. But pushing further into overbought territory is exactly what parabolic rallies do. And many of the technical tools supporting the thesis that the dollar is topping do not apply.
In practice, mean reversion tools such as oversold/overbought conditions, price exceeding the upper bounds of a Bollinger Band, or the percentage gain above the moving average du jour are best used in trendless markets.
Does the dollar look trendless? Absolutely not!
Don’t let these data points distract you. Let’s instead put the current DXY advance into perspective by focusing on historical price action.
1980 – 1988
Check out this DXY chart spanning from 1980 to 1988:
The US dollar index experienced serious moves during the ‘80s, rallying 37% from July ‘80 to Aug. ‘81.
A 10% correction followed into late November the same year before the dollar would climb another 58% by March ‘85.
An equally significant decline followed those explosive rallies as the DXY fell 48% during the 33 months following its ‘85 peak.
A similar pattern of prolonged strength followed by excessive weakness played out in the ‘90s and early 2000s.
1994 – 2005
The eleven years between 1994 and 2005 present several resemblances to the 1980s chart:
The US dollar index posted similar advances in the ‘90s, albeit over longer timeframes, culminating in a swift decline into the ‘04 lows.
From April ‘95 – August ‘97, the DXY jumped 27%. That’s on par with the magnitude of the present rally, but it took an additional twelve months to reach those heights.
Another strong advance took place between Oct. ‘98 and July ‘01, with the US dollar index climbing 32%. As with the second leg of the ‘80s uptrend, the rally into the early 2000s exceeded the mid-90s advance in both magnitude and duration.
And when it comes to the dollar… what goes up, must come down.
The overwhelming strength leading into ‘01 resulted in a trend reversal as the DXY dropped 40% from its ‘02 peak to the Dec. ‘04 trough. During the next 4 years, it lost another 12% before bottoming in March ‘08 – not unlike the 48% decline in the 80s.
2013 – Present
This chart covers 2013 – present:
We’re currently witnessing the second of two parabolic rallies during the last eight years.
From the May 2014 low to the March 2015 high, the US dollar gained 27%. Today, the DXY is up roughly 28% during a similar sixteen-month period.
If the current move is anything like the ‘80-’81 rally, we could see another 10% gain. That would put the DXY at around 123, coinciding with the 2001 highs.
It’s a real possibility – but that’s not the point.
The USD is likely in the 4th quarter of a parabolic rally, and with it comes increased volatility. Now is not the time to pick tops – and it’s also not time to jump on the long-dollar bandwagon.
A better option is to continue to ride the trend and protect open profits according to your trading plan.
Don’t worry if you’re not trading currency markets and you find these moves unsettling. History shows the dollar has traveled this path before.
Stay tuned!
Thanks for reading.
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Allstarcharts Team