Technical traders in currency markets are chirping about a bearish pattern forming in the U.S. Dollar Index that could push the greenback sharply lower if triggered.
The dollar has trended to the downside since the 2008 financial crisis despite a few “risk-off” spikes as the Federal Reserve continues its easy monetary policies such as bond purchases and rock-bottom interest rates.
“The dollar’s huge head and shoulders top formation is maturing. The target is 72,” writes Morris Hubbartt at Silver Doctors. “It will be activated when the dollar closes under 78, for two consecutive days. A breakdown under 78 should be accompanied by gold breaking above $1,800.”
The U.S. Dollar Index was trading around 79 on Friday. A currency ETF, PowerShares DB US Dollar Index Bullish (NYSEArca: UUP), is designed to track the benchmark, which reflects the greenback’s movement against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
UUP is down about 5% for the trailing six months. The dollar ETF is currently trading around the so-called neckline of the head and shoulders pattern. The bearish formation triggers when the neckline is broken to the downside.
A breakdown in the U.S. dollar could push stocks even higher since the two asset classes have shown a negative correlation.
“One of the intriguing catches to head and shoulder patterns is that they can fail very easily, when they are at the lows of the chart,” warns Gareth Soloway, chief market strategist at InTheMoneyStocks.com.
“This head and shoulder pattern is at a low. Should a head and shoulder pattern fail, look for a strong reversal in the Dollar,” he writes. “The markets and the Dollar trade inverse to each other. The Dollar leads the markets. Therefore, this pattern is extremely important to watch as it controls the future of the markets.”
PowerShares DB US Dollar Index Bullish