The U.S. Dollar (DXY): Ripe For A Downside Reversal?

Why would anyone step in front of the Northbound train that is the U.S. Dollar in foreign exchange dealings right now? Here are just a few bullish arguments from Wall Street analysts claiming that continued strength in the Dollar is a sure bet:

1. The U.S. Dollar Index (symbol DXY) is up 26% since May 2014, with almost no meaningful corrections along the way! Is the "trend" still your friend?

2. The Federal Reserve is hinting strongly that an interest rate hike is now on the not-too-distant horizon (June 2015 seems to be the consensus view for this action).

3. John Hilsenrath of the Wall Street Journal, who appears well connected to Fed officials (or is just the mouthpiece for the Fed when a policy change may be imminent), wrote an article earlier this week that the key word "patience" will be dropped from the Fed's official statement that will follow the upcoming March FOMC meeting. With this key word gone from the next Fed statement, Wall Street pundits are now proclaiming that a rate hike would then be imminent (within two or three months).

4. The European Central Bank has just started its 16-month $1.1 trillion QE program.

5. U.S. Employment Reports have been surprisingly robust over the last several months (at least on the headline numbers).

The Greenback is King right now! And maybe deservedly so!!

Today, the U.S. Dollar Index (symbol DXY) traded as high as 100.06 intra-day, before relatively minor profit-taking took hold. DXY ended at 99.44. Today's advance above 100.00 was the first above this key level since April 2003.

After 35+ years experience observing and participating in the financial markets, I feel confident in saying that almost any market opinion can be justified with a well constructed suite of carefully selected charts. However, with full knowledge that charts can sometimes be dangerous to your pocketbook, I still spend most of my research time reviewing my favorite charts and applying all my favorite indicators. 

Bottom Line: The U.S. Dollar now looks vulnerable to a meaningful correction! Here are a few charts that lend support to this minority view: Of course, if the Dollar does break now, then my current favorite investment of choice, Gold/Silver mining shares, will soar !!

U.S. Dollar Index (DXY) Monthly Chart with 3-Std. Dev. Bollinger Bands, Gann Lines, & Fibonacci Retracement

U.S. Dollar Index (DXY) Weekly Chart with 3-Std. Dev. Bollinger Bands and Computer-generated Buy & Sell Signals

Special Update: Classic Selling Climax In Gold/Silver Mining Stocks!

Since the January 21st, 2015 reaction high, when gold and silver mining stocks were up about 20% year-to-date, losses in these same stocks have been historic. The average loss is probably more than 30% from the January 21st intra-day highs to this morning's intra-day lows. Here is a representative sampling:

Goldcorp (GG)                                  -28%

Junior Gold Miners ETF (GDXJ)    -33%

Philadelphia Gold/Silver Miners Index (XAU)   -22%

First Majestic Silver (AG)              -35%

Endeavour Silver (EXK)                -51%

Silver Miners ETF (SIL)                 -31%

While it's true that the underlying precious metals prices fell sharply during this period (Gold down 12%, Silver down 16%), the volatility in this sector is off-the-charts right now, especially over the last four trading days. Most Gold and Silver mining shares fell 5% per day, on average, over the last four days in a classic selling climax that ended at approximately 11:15 AM ET this morning. The V-shaped rally in gold and silver stocks after the intra-day lows were posted today was exceptional. By the end of the day today, one small silver stock (EXK) actually jumped 16% from its intra-day low. Most gold and silver stocks rebounded at least 5%, with the average closer to +8%.

In the interest of full disclosure, gold and silver mining shares now account for a 40% allocation of my assets under management. 75% of these positions were accumulated over the last four trading days. 

Was this morning's heavy selling in the gold and silver mining shares a classic selling climax? Yes, I think so! Underlying gold and silver prices were actually down on the day today, which strongly suggests that the extraordinary rebound of gold and silver mining shares in afternoon dealings was potentially a significant bullish tone change for this entire sector. My strong feeling is that this entire group is dramatically underweighted by fund managers, and that this sector is officially among the "most hated" again in terms of investors sentiment! Today's oversold bounce could easily represent the beginning of an extended advance lasting several quarters.

If today was a major low in gold and silver mining shares, how much upside can we expect over the near-term and intermediate-term horizons? If we define 60 days as "near term", then I think gold and silver mining shares could easily advance 50%, or more, on average. If we define 150 days as the intermediate term, then I think gold and silver mining shares could advance 100% or more from today's intra-day lows.

Daily chart buy signals were triggered by my computer trading system in the following gold and silver mining shares at today's NY close: AEM, AG, AXU, AU, AUY, CDE, EXK, FSM, GDX, GG, PAAS, PPP, RGLD, SIL, and XAU. And here are a few representative charts:

Gold Miner Shares ETF (GDX) Daily Chart with 3-Std Dev. Bollinger Bands

Silver Miner Shares ETF (SIL) Daily Chart with 3-Std Dev. Bollinger Bands

Philadelphia Gold/Silver Miners Index (XAU) Daily Chart with 3-Std Dev. Bollinger Bands