Jesse Colombo

After its powerful bull market two years ago, the U.S. dollar has been treading water for most of 2015 and 2016, confusing and frustrating many market observers – including myself – who are waiting for the next major move. I’ve been watching the dollar’s consolidation pattern closely for at least a year because I believe the final breakout will lead to another notable move that will strongly affect other currencies and dollar-sensitive commodities.

The U.S. Dollar Index is trading in a well-defined range between its 92 support level and 100 resistance level. A convincing breakout in either direction is needed to confirm the next upcoming directional move. The prior trend was up, which increases the probability of a bullish breakout from this consolidation pattern – but, again, confirmation is needed.

Weekly Dollar ChartSource:

The monthly U.S. Dollar Index chart shows the current trading range in the context of the longer-term price history. If a bullish breakout eventually occurs, the early-2000s resistance level of 120 is an important long-term price target to watch. A continuation of the U.S. dollar’s bull market would likely require a tightening of U.S. monetary policy combined with a continuation of the loose monetary policies in Europe and Japan.

Monthly Dollar ChartSource:

At the end of the dollar’s bull market in early-2015, the “smart money” (commercial futures market hedgers) built up their short positions at the same time that “dumb money” (large trend-following futures traders) became most bullish. During the consolidation of the past two years, however, the smart money has become fairly bullish again, while the dumb money has soured on the dollar. The last two times these role reversals occurred (see circles on chart), it preceded bullish moves in the U.S. dollar.

Weekly Dollar Smart Money ChartSource:

Anyone who is trying to determine the U.S. dollar’s next move should also keep an eye on the euro and its key levels, chart patterns, etc. The two currencies make similar moves, but move inversely to each other. Like the dollar, the euro has been trading in a well-defined range since early-2015. Support is at 1.05 and resistance is at approximately 1.16 at the moment. A convincing breakout in either direction is needed to confirm the next major move in the euro. A bearish move in the euro is typically bullish for the dollar and vice versa.

Weekly Euro ChartSource:

The longer-term euro chart shows the two year-old consolidation pattern in a larger context. If the euro eventually breaks decisively below its 1.05 support level, the next long-term price target and support level to watch is .8500. Of course, such a move would require a similar bullish move in the U.S. dollar along with tightening of U.S. monetary policy combined with continued stimulus in Europe and Japan.

Monthly Euro ChartSource:

Echoing the moves of “smart money” dollar futures traders, “smart money” euro futures traders have pared back their bullish bets during the consolidation of the past two years. At the same time, the “dumb money” – who are typically wrong at major market turning points – have become increasingly bullish. Of course, technical confirmation is still needed in the form of a convincing breakout or breakdown from this consolidation pattern.

Weekly Euro Smart Money ChartSource:

There are an incredible number of confusing cross-currents that make it difficult to determine market direction by following news or central bank action alone. Following price and volume action while waiting for technical confirmation is a good way of improving the signal to noise ratio. For now, I will continue to watch which direction the dollar and euro ultimately break out from their multi-year consolidation patterns.

Please follow or add me on TwitterFacebook, and LinkedIn to stay informed about the most important trading and bubble news as well as my related commentary.

(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)