It's All About the Tubmans

THE US DOLLAR'S TECHNICAL PATTERN IS FLASHING A BUY SIGNAL

Back in February, I noted that the US Dollar was breaking down and discussed how a less strong domestic currency would affect the market...

http://tancockstradingblog.blogspot.com/2016/02/the-death-of-dollar-rally-and-why-it.html

Today, the greenback is flashing a buy signal all of a sudden as the technical pattern has shifted from a bearish trend pattern to a consolidation/fill gap pattern.  Here's the USD chart:

The red circle shows the dollar's move today inside of the moving average variance gap... this typically suggests that a security will become range bound in between the two averages while they collapse on each other.  However, the fill gap pattern is the least reliable trading pattern of the four that I chart so it's not unheard of for a security to move in and out of these ranges without consolidating.  This actually happened with the dollar in March, shortly after it started its breakdown.

But what happens if the dollar's slide is in fact coming to an end.  This could be an indication of changing sentiments towards Fed policy as markets have rebounded nicely after two recent bouts of volatility.  If that is the case and traders return to a hawkish bias, there could be ramifications for the broader equity markets.

As I noted back in February, a weaker dollar would be favorable to lower volatility and higher natural resource prices... and (like a rooster taking credit for the dawn) both of these have happened.  If the dollar begins to appreciate again, these benefits could be lost.  A stronger dollar would benefit the equity market's largest sector, however, as financials have trailed the broader market rally until recently and would welcome the positive carry.  Should that benefit offset renewed bearishness in commodities like oil and steel then markets may temper potential selloffs.

The unfortunate end result of renewed dollar strength could ultimately be a type of ying-and-yang or roller coaster type of price action.  If a stronger dollar does in fact lead to renewed volatility, currency traders would most likely return to their dovish positions and the whole cycle would start over again.  Basically, dollar strength would lead to market weakness which would lead to dollar weakness which would lead to market strength. 

Next week's Fed meeting will definitely impact this move and should give traders some clarity.  For now, though, all we can do is wait and see.