Although some chartists we respect have recently turned bullish on the dollar, count us among the skeptics.  Technically speaking, and based on our proprietary indicators, there are two specific reasons for this. The first is on display in the 240-minute bar chart of the NYBOT Dollar Index shown below. Notice the strong upthrust that began on May 5 from a low of 72.70. We’d be the first to concede it looks like a real barn-burner — provided the steep pitch of the rally is considered and nothing else.  However, a trend’s steepness is of little concern to those who use the Hidden Pivot Method – the same method that Rick’s Picks has honed and taught to hundreds of traders over the years.  For it is not the angle of an uptrend or downtrend that tells us how strong it is, but rather the number of prior peaks or lows that the initial thrust, or “impulse leg,” exceeds without pausing for breath.  In this instance, and as you can see, buyers have hesitated just below each of several such peaks, pulling back from each in order to get a running start. Long experience tell us that this is not how the Dollar Index should be acting if buyers are indeed gearing up to launch a major offensive or perhaps even a new bull market. Instead, each new thrust should effortlessly skewer peaks to the left of it.  Moreover, fledgling trends with sufficient power to reverse a long-term trend tend to surpass two, three or more such peaks with their first “impulsive” thrust.

Look closely at this rally, however, and you’ll see that, for starters, it needed to catch its breath just to get past the little pisher-of-a-peak at #1. Pretty chicken-hearted, really. And that is why we told subscribers last week that if there was anything to notice about the dollar’s recent, unaccustomed upturn, it was the timidity of it. In fact, we should have expected an explosively bullish reversal, since the greenback has been getting sold down relentlessly for nearly a year, generating the kind of sentiment numbers that suggest everyone really is on the wrong side of the trade. Under the circumstances, the modest rally that has occurred so far must be judged a disappointment. As for the sentiment numbers, perhaps we’ll have to play the role of contrarian’s contrarian for now, accepting the possibility that, at least for the moment, “everyone” (i.e., all of the bears) is right. And, yes, after 35 years of trading and market-watching, we fully understand why this paradox cannot endure for long, much less indefinitely. But we view it as no more of an anomaly than the “extremely overbought” or “extremely oversold” indicators that occasionally become even moreso before a stock of commodity finally reverses direction.

What If Our Target Is Missed?

Readers of these commentaries will know that the Hidden Pivot Method tries to be very precise in nailing swing highs and lows. Last Wednesday, for instance, it would in theory have allowed subscribers to short the E-Mini S&P futures at the week’s exact high, 1358.25. When the futures fell 30 points from that number the next day, producing a paper gain of $1500 per contract, we told subscribers to stay short — and to do so without using a trailing stop until theoretical gains per contract reach at least $5,000. (We remain short as of this writing. Theoretical risk at the time of entry would have been $50, since we’d advised an initial stop-loss of 1.00 point.)  Those of you who are unfamiliar with the Hidden Pivot Method might be curious to know what is implied when a Hidden Pivot target is missed.  And that brings us to the second reason we are skeptical about the rally in the dollar. For in fact, we’d have predicted that the Dollar Index would turn from a low of exactly 73.51. In the actual event, it went lower, to 72.70, before making the turn.  Close enough? Not in our book. The nearly year-long pattern that produced the “Hidden Pivot” target was delicate and precise, and that is why we were expecting the reversal to come from within a few hundredths of a point of it.  However, because the target was exceeded by a relatively large 0.81 points, we have inferred that still more weakness lies ahead. If we are right, a major turn should come from dramatically lower levels. Click here if you don’t subscribe but would like to know exactly what we are predicting.

One more caveat. Just as we have inferred more weakness is likely because a downside target has been exceeded, we would be ready to turn bullish on a dime if the rally were to pick up steam, soaring above peaks #2, #3 and #4 in the chart. But as things stand, according to our technical runes, the current, minor rally is fated to go no farther than 77.49, or about 2.3% higher. We’d want to take another close look if and when the Dollar Index gets there, paying attention not to the fact that a couple more prior peaks will have been exceeded by then, but to how easily they were exceeded.  Meanwhile, and for what it’s worth, we are fundamentally bullish on the dollar because it seems inevitable that Spain’s financial house of cards will collapse, taking the euro with it. Ultimately, though, we would rather trust our charts than such subjective, complex and ultimately futile speculation as would try to take into account the economic fate of Europe. At present, the charts say the dollar will need to go lower before it can make a solid bottom, and that is why we continue to view this rally with skepticism. If it should prove us wrong based on the criteria detailed above, we’ll have no qualms about going with the bullish flow.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)