Is the dollar bear market over?
Cliff Droke
A battle is being waged over the U.S. dollar. On one side are the bears, firmly entrenched and encouraged by the year-long slide in the currency's value. On the other side are the bulls, who have lately begun to snort and show their strength. And much to the chagrin of the bears, the bulls appear to have the horns to back up their charges.

This technical battle over the dollar is shaping up to be a bigger one than many believe. Dollar bears have been the biggest naysayers, contending that the latest rise in the value of the dollar index is simply an oversold technical rally with the previous downtrend to resume shortly. But is this actually the case? The charts suggest that this time around the bulls may actually be able to push the dollar higher and out of its elongated downtrend channel. At the very least they will be given an adequate chance to do so.

Above is the weekly dollar futures chart, which shows this downtrend channel in detail. The dollar hit a recent low of 98 at the lower boundary of this channel and have since bounced higher over the past two weeks. A minor downtrend line has already been broken, and a second and more important one will likely be challenged before the month is out between basis 104-106. If the dollar can penetrate above 106 it will effectively break the downtrend channel and shift the tide more to the bull's favor. This in turn would give them leeway to run the dollar to still higher levels since a 4-year parabolic dome (shown in the monthly chart below) will have been broken, with a new parabolic bowl (also seen in the chart below) will take precedence.

As you can see from the above monthly dollar chart, what we are witnessing is a class battle between the bulls and the bears, a war that is symbolized by the clashing parabolic structures in the chart. The winner of this battle will be able to have their way in terms of the inflation/deflation debate, as a penetration of the dome will mean the return of deflation in full force, while a breakdown beneath the rim of the bowl will mean more inflation in many areas of the economy, including commodities.

So which side is likely to win out? Right now the advantage would be to the bulls, which is reflected in the multi-year lows in dollar market sentiment (contrarian indicator), the sizeable increase in the net long position of commercial traders, the extremely high trading volume at the recent lows in the dollar index, and the fact that both the weekly and the monthly charts show that prices bottomed at the precise vertex, or mid-point, of the parabolic bowl (typically bullish). All of this point to more than just a minor rally ahead, although a strong follow-through is needed to confirm. Again, it all comes down to the dollar's interaction with the bowl and dome in its monthly chart.


March 23, 2003

Clif Droke is the editor of the weekly Bear Market Report, a combined forecast and analysis of U.S. stocks and indices and international precious metals stocks, and is the author of numerous books on finance and investing, including most recently "Gold Stock Trader's Almanac 2003." Visit his web site for free samples of his analysis at www.clifdroke.com