The U.S. dollar has been trending lower for the past month, but speculation in some quarters that the bear market begun in July of 2001 has returned is not only premature but unwarranted. To the contrary, there is strong technical evidence that the dollar will soon be moving higher, reviving the baby bull that began early this year. To be sure, it is still just a baby, one that would need climb more than 10 percent from current levels to completely dispel the pessimism of the four-year decline that had come before it.

(Click on chart to enlarge)

But as the chart above makes clear, the Dollar Index has had little difficulty chomping through daunting supply on each of its last two rally legs. The first (A-B) surpassed a series of previous peaks that I have labeled #1; the second (C-D) pushed past an even more imposing peak (#2). According to my hidden-pivot method, that is exactly what bull markets are supposed to do – i.e., create fresh impulse legs with each visually obvious thrust. To qualify as a true impulse leg, the rally must exceed two prior peaks. In this instance the prior peaks are of weekly-chart magnitude, implying that the rally itself is more than a piker.

I mentioned that the uptrend would need to make significantly more headway before we can confidently infer that a major bull market is under way. Specifically, a print above 99.25 (peak #3) is needed. That would create a bullish impulse leg of monthly-chart degree, effectively clinching the case for the long-term bull. Alternatively, to cast doubt on our bullish scenario, the Dollar Index would need to fall below 81.28 (point X), an occurrence that would negate the positive implications of the recent move above peak #2. That’s possible, of course, and it therefore behooves us to pay close attention to even small signs that the odds may have shifted in the bear’s favor. For the record, such a signal would come at 88.52, a single tick beneath a low recorded in early October that is not distinguishable on the weekly chart.