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In Wednesday’s Money Morning, I rather glibly said “I’m calling a sell” on the US dollar.
I just wanted to expand today on why I made that statement.
The US dollar is, of course, perhaps the single most important price in the world, and so you, dear reader, should not take one commentator’s view as gospel.
But, with that in mind, let me present my simple reasoning for making that statement.
I did not base that call around Donald Trump’s trade policy, or China, or the latest statement from the Federal Reserve Bank, US national debt or any of the other of the multitude of factors that affect a currency’s price. I have stripped all such thoughts from my thinking.
Instead, I based that call around a simple trend-following strategy that I have outlined on these pages before.
What the dollar’s trend is telling us now
This is a medium- to long-term strategy, and you might often only get one or two signals a year. I stress that in flat markets, it does not work. You get whipsawed out. But if there is a trend, you catch the lion’s share of it.
So here is the US dollar index (which measures the US dollar against a basket of major currencies) since 2014.
As well as the price (in black), we have two moving averages. These show the average price of the previous 21 weeks (blue line) and nine weeks (red line), and help define trends. These are exponential moving averages (EMAs), so extra weight is given to more recent weeks (as opposed to “simple moving averages”, or SMAs).
When the red line crosses up through the blue line you have your buy signal, and when the red line crosses down through the blue line you have your sell signal. I have marked the buy signals in green and the sell signals in red.
On the left, you can see the beautiful buy signal which came in July 2014. It kept you onboard for the entirety of that trend, long for over a year, and the sell did not come until September 2016. That sell was quickly reversed into another buy.
2015-2016 was a bad period for the system. The US dollar range traded between about 92 and 100 – it did not trend – and so the system lost money.
But then in April 2017 we got another sell signal which enabled us to ride a lovely trend down through until May 2018 when the next buy came along. So began another trend, which lasted 14 months.
All good things come to an end, however. We look like we are just about to get another sell signal. The US dollar has gone to 95. The 21 and nine-week EMAs are both sloping down, and the nine-week EMA (blue line) is crossing down through the 21-week EMA (red line).
This is as a text-book a sell signal as you will ever see, by this system. It looks like a new trend has just begun and that trend is lower.
Of course, we could get another frustrating period of range-trading such as we had in 2015-2016. Given the conflicting signals that abound in the global economy at the moment, such a scenario would not be unlikely.
But at least you now know why I am calling “sell”. That is what my trend-following measures are telling me.
Note that this does not require immediate action – this is a medium to long-term system. We could quite easily rally to 96 on the index and still be on a sell signal.
But the medium-term trend, whatever the short-term fluctuations may be, is now down. Until further notice…