“While I believe the longer-term move continues to be bullish [for the dollar], there is likely to be a retracement in the coming months to establish a new stable price platform from which future gains can be made.”
That’s what I wrote about the U.S. Dollar Index (DXY) back in February.
It’s still playing out too and that means the DXY is headed for a big change sooner than later.
Over the last decade DXY has formed a massive head-and-shoulder pattern.
It’s a pattern which looks, as the name implies, a two shoulders and a head in the middle.
It’s also a very bearish indicator. After the second shoulder is formed and the price breaks down below it (which confirms the pattern), the drop is often long and severe.
The DXY’s head and shoulder pattern, however, was never confirmed. It failed. And that’s why the dollar has taken off.
But every major run up in price is accompanied by some sort of consolidation. It gives the underlying trend time to catch its breath. That’s what’s likely to happen to the DXY next.
The U.S. Dollar’s Next Move
In order to gain some additional perspective I tapped into the Oakes Momentum System to see where things stand.
The system tracks the number of different waves formed by the price movements of all asset classes.
History has shown there are usually five major waves an asset goes through in every cycle.
The chart below shows the DXY is nearing the end of it’s third wave.
I’ve labeled the number of waves as I currently see it in the monthly price chart below:
All signs say the DXY is in the beginning stages of another pullback.
The upward momentum on the dollar dropped recently and if we take a look at the chart of the DXY, we can see some significant speed bumps ahead.
According to the analysis, the dollar could drop as much as 12% in the next wave.
After that it would rise back again to new highs and beyond.
This has tremendous implications for all investors.
Right now the DXY is still near multi-year highs. After years of getting burned betting against the dollar, this is a sign investors are capitulating and either buying in or moving on.
It’s the sign of a top -- at least a temporary one -- in the dollar.
That all means you’ve got a few months here to move out of dollars and into assets which benefit from a falling dollar.
That could be shares in top U.S. exporters who would benefit from a falling dollar.
It could mean avoiding companies whose costs are highly affected by foreign currencies like U.S. manufacturers who outsource a lot of their production abroad.
Or it could mean buying into already depressed international markets like Europe where there are some great values which would would add an additional 10% or more in gains due just to appreciation in the euro against the dollar.
There were a lot of consequences for all investors when the dollar soared. There will be just as many when it corrects.
Finally, it’s important to remember the current cycle of the dollar will take years to play out. But now that you have a greater understanding of where things are headed next, how big the swings will be ahead, and how to position yourself for all of it, you’ll be well prepared for it all.
That alone gives you a leg up on most everyone else.