Tradable Instruments:
PowerShares DB US Dollar Index Bear – (AMEX:UDN)
The UDN is an exchange traded fund that tracks the changes in value of Euro, Japanese Yen, Canadian Dollar, Swedish Krona and Swiss France relative to the US Dollar. It shorts the USDX contracts, essentially shorting the US Dollar and long the Euro, Japanese Yen, Canadian Dollar, Swedish Krona and Swiss France.
SPDR GLD US$ – (SGX:O87)
SPDR Gold Trust – (AMEX:GLD)
SPDR Gold Shares (GLD) is an exchange-traded fund (ETF) that offers investors an innovative, relatively cost efficient and secure way to access the gold market. SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of security on a regulated stock exchange.
GLDUSD (Phillip Futures)
Ishares Silver Trust – (AMEX:SLV)
The Ishares Silver Trust (SLV) is an exchange-traded fund (ETF) that seeks to reflect generally the performance of the price of silver
SLVUSD (Phillip Futures)
98 Month cyclical top
Since the 1970s, the DXY has been following a 98-month cycle or approximately 8 year where it forms a cyclical top at the end of the 98th month. Each cyclical top is then followed by massive selloff resulting in the DXY collapsing back to the previous low from the prior downtrend. The selloffs ranged from 12% to 42% over the last four cycle.
Figure 1. 98-month cyclical top is formed, calling a 30% downside in DXY
Source: Bloomberg
In total, there were four instances where the DXY traded around 98-month cycle:
Notice how every cyclical top results in a selloff that is in the order of magnitude that retests its prior respective lows and each cyclical top is being signaled by bearish price action such as Bearish Engulfing/Outside Bar or Shooting star.
If we were to use the April 2009 cyclical top as the reference point for the current cycle calculation, using the 98-month average will bring us to May 2017. In other words, the range around May 2017 will be the timeframe to look out for the next cyclical top within the DXY. Keep in mind the 98-month cycle is a rough estimation of where to locate the cyclical top.
With the benefit of hindsight, the strong Bearish Outside bar rejection off the 103.50 resistance recently in January 2017 is pointing out that a new cyclical top has been formed. That also suggest the current cyclical top took 94 months to finalize which is well in range of the cyclical top formation of 89 months to 108 months. If history were to repeat, there is a high chance that the DXY will move into a forceful downtrend next to retest the previous decade low of 73 – 72. That move will translate into a -30% loss.
Near term target for the DXY will be around the 92.61 range low.
Long Term Fibonacci Retracement Level
To better pinpoint the exact timing of the cyclical top, we did a thorough price action study and the conclusion was that the DXY is still stuck in a depressed long term downtrend. We noticed the DXY tends to react to critical Fibonacci Retracement Level that was originated from prior long term downtrend.
Figure 2. 61.8% critical Fibonacci Retracement Level currently resisting price
Source: Bloomberg
During the recovery phase in 1995 – 2001, the DXY was moving in a stable uptrend. However, as it neared the 50% Fibonacci Retracement level (121) that was established in the downtrend since 1985, the DXY eventually reversed and turn into a downtrend in July 2001. Moreover, this bearish rejection off the 50% Fibonacci Retracement level happened in line with the 90-month cycle and was signaled by a Bearish Outside Bar and RSI Bearish Divergence as well.
Fast forward to current times, the DXY made another strong recovery since 2011 but the bullish momentum appears ready to reverse. The DXY once again reacted violently to the 61.8% Fibonacci Retracement level from the 2002 downtrend resulted in the formation of a Bearish Outside Bar rejection in January 2017. Furthermore, the current bearish rejection was in conjunction with the new 98-month cyclical top and RSI Bearish Divergence. The DXY has also closed back below the 100 psychological round number which successfully turned the sentiment back into the bearish camp.
Notice how similar the current cyclical top is to the one in July 2001. Both cyclical top were signaled by Bearish Outside Bar rejection off the respective critical Fibonacci Retracement level. In addition, the bearish rejection was also signaled by a broader bearish formation, heads and shoulder pattern/triple top pattern with RSI Bearish Divergence.
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Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.
He is also a regular columnist on The Business Times - every Monday ChartPoint column.
He graduated with a Bachelor of Science in Banking and Finance from University of London.
