The Technical Argument for a Stronger Dollar
Tuesday, October 4, 2011
Executive Summary
- The dangers of depending on correlations
- The dollar as ‘anti-euro’ argument
- Key support levels to watch
- Cycles analysis of dollar prices
- Keeping the limits of technical analysis in mind
Part I – Heresy and the U.S. Dollar
If you have not yet read Part I, available free to all readers, please click here to read it first.
Part II – The Technical Argument for a Stronger Dollar
In Part I, I raised the potentially heretical possibility (at least to some) that the U.S. dollar, as reflected by the DXY dollar index, might be in a multi-year uptrend, and then endeavored to sort through the psychological underpinnings of resistance to this possibility.
Here in Part II, I will lay out the technical case for the DXY’s possible multiyear advance.
I would like to start by addressing correlations. Given our minds’ predilection for pattern-matching, it’s natural to see correlations between two slices of the market. For example, when the DXY rises, the stock market declines. This correlation invites speculation on reasons that would explain the correlation.
As the saying goes, correlation is not causation, and so while this line of speculation might illuminate some hidden causal dynamic in play, it also offers ample opportunity for distraction and misguided conclusions.
Another correlation many see is between gold and the DXY; in other words, that gold rises when the dollar falls, and vice versa.
Either or both these correlations may or may not be valid in any specific timeframe, but I choose to ignore these and other possible correlations because they tend to muddy the emotional and technical waters.
For example, if a proponent of gold believes a rising dollar will push down gold, he is predisposed to reject the possibility of a rising dollar because it pushes against a key conviction of his trading strategy.
by jim-h-2