Chartology: "The Dollar Rally May Have a Long Way to Run"

From Barron's Getting Technical column:
The U.S. dollar index took out a major hurdle on its long-term chart, suggesting it can keep rising.

The U.S. dollar has been on a tear higher since July. Whatever the fundamental issues driving the move – the economy, global trade, or a flight to safety – the technicals look bullish for the long term.

Many dollar forecasts start with the U.S. dollar index, which is a trade-weighted basket of currencies, each paired against the greenback. The euro still makes up more than half the weight of that basket but it is not the only currency against which the dollar is rising. 

A long-term chart of the index shows the convergence of two major resistance features in the 84.75 area (see Chart 1). After rising from roughly 80.00, in round numbers, in less than three months, the index paused just under that ceiling this month. And Wednesday, it finally punched through, trading above 85.00 for the first time since 2010.

Chart 1

U.S. Dollar Index

Trends in currencies, once they get going, tend to persist for a long time and are often measured in years. Clearly, there was no major trend for the dollar for the past two years as the chart shows choppy sideways movement. Even the cyclical bull and bear markets that took place in the aftermath of the financial crisis of 2008 lasted no more than nine to 12 months.

But looking back in time, we can see trends that lasted on the order of a decade. I am not suggesting the dollar is in the dawn of a 10-year run, but rather that this may be the start of a long period of dollar strength, and all the consequences that brings to economists and gold bugs. 

Of course, we should not confuse the long term with the short term. The dollar index is technically overbought, meaning that it has risen too far, too fast, to sustain its current pace. That does not mean it will immediately back down, but it is a dangerous condition for new dollar buyers. Even with the technical breakout in place, overbought markets can stall just enough for weak bulls to question their choices. The ensuing shake-out sets the stage for the next leg up....MORE