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Will the US dollar fall off the cliff?

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The ICE US dollar index DXY is reeling under pressure and has fallen to multi-year support zone of 92-93. At the start of the year, most big brokerages and banks were bullish on the dollar and they expected it to rally in 2017, extending its bullish run that started post the US Presidential elections.

Key observations

  1. The US dollar topped out in January of this year
  2. The DXY has fallen more than 10% from its highs and is likely to fall to multi-year lows.
  3. Most of the fall can be attributed to politics, rather than to a weak US economy
  4. The US economy continues to be strong and the Fed is likely to continue its tightening cycle
  5. If the Trump administration can pass a respectable tax reform, the dollar will rebound sharply

However, the DXY topped out at 103.82 on January 03, of this year and has fallen more than 10% since then.

So, is the dollar doomed or is this fall a buying opportunity for the medium to long-term?

Reason for the US dollar’s strength after the US Presidential elections

Donald Trump’s victory in the US Presidential elections boosted the dollar on hopes that tax cuts and higher infrastructure spending will invigorate the economy and force the US Federal Reserve to raise rates at a much faster pace than previously envisaged.

As a result, the DXY index rallied from a low of 95.89 on 09 November 2016 to a high of 103.82 on January 03 of this year, a gain of more than 8% within a short span of time. However, the DXY topped out at that level and has been in a downtrend ever since.

But why?

What has changed since then?

To start with, the President started deflating the dollar balloon when he said that the dollar was “too strong” during his interview with the Wall Street Journal on January 16 of this year.

Along with that, the repeated failure of the current administration in repealing the Affordable Care Act, also known as Obamacare increased the uncertainty around the tax reforms  – a major event that will affect the dollar.

Though the Republicans are confident of passing the tax reforms before the end of the year, only time will tell whether they are able to achieve their target. As long as the uncertainty remains, the dollar will remain weak.

The dark clouds over the eurozone have dispersed for now

The eurozone had been facing certain events, which threatened the existence of the euro. After Brexit, the Italy referendum and the French elections were keeping everyone on the hook. However, all those events passed without causing any major damage. That boosted the confidence in the euro.

Additionally, the analysts expect the ECB to taper its bond buying program soon. Though the ECB President Mario Draghi attempted to sound dovish, the markets did not buy it.

Similarly, the UK has not fallen apart after the Brexit. As these currencies regain their composure, the DXY gets pressured, as it is the weighted geometric mean of a basket of currencies.

Nevertheless, it is not all doom and gloom for the dollar. There are some positives as well. Let’s look at them.

The US economy is on a strong footing

The US economy grew 2.9% in 2015, the best since 2005, but slowed down considerably in 2016 to only 1.5%. In the first quarter of this year, the growth was dismal at 1.2%, however, the economy rebounded sharply in the second quarter, growing by 2.6%.

The strength in the economy has encouraged the Fed to tighten twice already this year. Nonetheless, the market participants are divided about the third rate hike before the end of this year, according to the Fedwatch tool data.

Rick Rieder, Managing Director, Global Chief Investment Officer of Fixed Income at BlackRock believes that the Fed will not go ahead with another hike in 2017. He, however, believes that the Fed will hike three times in 2018. Overall, the Fed has made it clear that the era of low-interest rates is over.

Not only that, Janet Yellen has said that the Fed is considering unwinding its massive bond holdings “relatively soon”. Both these events are bullish for the dollar.

But, does the dollar always rally when the Fed tightens? Let’s dive into its recent history to find out.

How did the US dollar perform during the last three tightening cycles?

In the chart (sourced from ashraflaidi.com) above, we can see the dollar’s reaction to the three previous tightening cycles.

On all the three occasions, the dollar behaved differently. While the dollar fell sharply during the 1994-1995 tightening period, it had a nice run in 1999-2000 period. On the other hand, it was largely range bound during the rate hikes in 2004-2006.

Therefore, it is not necessary that the dollar will rise with every tightening cycle. It will depend on a number of factors, both within and outside of the US.

What can tip the table in favor of the dollar this time?

The current slide in the dollar is more to do with the political missteps rather than the condition of the economy. After failing to repeal Obamacare, the Republicans are likely to do their homework and come prepared with a credible tax proposal that can see the light of the day.

If the tax overhaul is noteworthy, it alone is sufficient to propel the dollar higher.

Other than this, the geopolitical tensions with North Korea, China, and Russia can also send the traders scooping the dollar, which is quoting at multi-year lows. After all, the dollar is the de facto reserve currency of the world and is considered to be one of the safe haven currencies.

Though the eurozone looks stable currently, it still has to deal with Greece and the Italian banks in the long-term. Any brewing crisis there is likely to send the traders back into the dollar from the euro.

What are the risks for the dollar’s recovery?

If the current administration cannot get any significant legislative bills passed, it will be a major downer. The economic recovery is maturing. Any signs of a weakening growth will send the dollar down the sinkhole. It is unlikely that the dollar will fall due to external factors.

What do the charts tell us?

Let’s first analyze the weekly chart of the dollar index. As seen above, the dollar has been in a range between 93 and 100.5 since the beginning of 2015. The index broke out of the consolidation following the US Presidential elections last year, however, it could not sustain the gains and fell back into the range. Since then, it has been in a sharp decline, quickly falling from the top of the range to the bottom.

The DXY has bounced sharply from the 93 levels on two previous occasions. However, this time, a breakdown looks imminent. Nevertheless, an important point to note is that the dollar has fallen without any major pullbacks and the RSI is oversold on the weekly charts.

Every time the RSI has dropped in the oversold zone on the weekly charts it is followed by a sharp pullback. We expect the same to occur this time too. So, should one buy now?

The daily chart shows that the downtrend in the dollar continues. It has broken below the 93 levels and is threatening to fall to multi-year lows. Therefore, it is not the right time to go long. We should wait for the dollar to stop falling and then initiate long positions with a suitable stop loss.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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2 Comments

2 Comments

  1. Finch

    August 4, 2017 at 7:13 am

    Very good, thank you for your insights!

    • Rakesh Upadhyay

      August 4, 2017 at 12:00 pm

      Hello Finch,

      Thank you for the encouragement.

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Analysis

Litecoin Update: Wyckoffian Accumulation Complete

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From a technical perspective, Litecoin (LTC/USD) has effectively ended its bear market. This statement may sound unbelievable to many; even to some bulls. We’ve decayed in a crypto winter for so long that many of us have forgotten what a bull market looks like. We’re so used to seeing bounces fade and eventually get dumped on, that we’ve grown skeptical of rallies.

However, this time it’s different. It truly is, and we have multiple reasons to back up this claim. In this article, we explore the signals that show how Litecoin completed its Wyckoffian Accumulation.

Smart Money Accumulation Complete

A bear market often does not end due to exhaustion. It usually ends because a big player has entered the market to stop the bleeding. This individual or entity, which we’ll refer to as the smart money, absorbs the intense selling pressure of a capitulating market while keeping the price relatively stable. During this period of the market cycle, the smart money accumulate positions.

We believe that Litecoin has already completed this market phase. Its daily chart shows many similarities to a Wyckoff Accumulation Schematic.

Wyckoff Accumulation (Source: Stockcharts)

Preliminary Support

The first similarity is the establishment of a preliminary support (PS). According to the Wyckoffian theory, the PS offers some semblance of support after a prolonged or substantial move down. In Litecoin’s case, it registered a PS of $27 on November 24, 2018. During this time, Litecoin showed signs of stability after weeks of massive selloffs led by Bitcoin’s (BTC/USD) break below $6,000.

LTC/USD Preliminary support

Selling Climax

The second similarity is the presence of a selling climax (SC) or capitulation which occurred on December 7, 2018. On that day, Litecoin recorded lows of $22.24 while generating volume that’s over 115% of its daily average. The heavy volume points to the emergence of a big player. Also, notice how Litecoin managed to stay above $22 for about a week. This is another indication the smart money protected the bottom.

LTC/USD Selling Climax

Automatic Rally

The third similarity is the automatic rally (AR) after the selloff. The AR happens due to the selling relief provided by the conclusion of the SC. With reduced selling, buyers can easily push the price up. In the case of Litecoin, the AR drove the price to as high as $36.78 on December 24.

LTC/USD Automatic Rally

Secondary Test

The fourth similarity to the Wyckoff Accumulation is the secondary test (ST). During this stage of the accumulation, the price revisits previous lows to test the supply and demand. In Litecoin’s case, the ST coincides with the PS at $27.

LTC/USD Secondary Test

Last Point of Support

Like clockwork, Litecoin printed two last points of supports (LPS). The LPS is described as a previous resistance that was flipped into support. For instance, the first LPS was posted on January 13, 2019 when the market was trading at $30. Notice how the market struggled to go above this level between December 17 – 20, 2018. On January 13, Litecoin flipped this into support.

LTC/USD first last point of support

The second LPS of $32 was printed on February 2, 2019. Notice how Litecoin struggled to go above $32 from January 13 to February 1. When the market conquered this level, it did not look back.

LTC/USD second last point of support

Signs of Strength

Lastly, Litecoin showed signs of strength (SOS) on February 8 when it took out resistance of $40 with heavy volume. The volume printed on that day was over 390% of its daily average. To put that into perspective, that was Litecoin’s highest volume in one year.

LTC/USD signs of strength

With so many striking similarities with the Wyckoff Accumulation Schematic, we believe that Litecoin has completed this phase of the market cycle. Next comes the markup, which is most commonly known as the uptrend or the bull run. For this cycle, our minimum target is $110.

Bottom Line

Claiming that Litecoin is ready for a bull run may sound absurd to many. However, we dissected the market’s movement over the last few months and discovered that it has most likely completed a Wyckoffian Accumulation phase. If that’s the case, our minimum target for the markup is $110.

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 332 rated postsKiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Altcoins

Litecoin Price Analysis: LTC/USD on a Potential Launchpad for Another Rocket to the North

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  • The Litecoin (LTC) price remains elevated, as the bulls look at continuing the strong recent run higher.
  • Coinbase Wallet announces support for Litecoin, joining the likes of bitcoin (BTC), bitcoin cash (BCH), Ethereum (ETH) and Ethereum Classic (ETH).

LTC/USD: Recent Price Behavior

The LTC/USD bulls have resumed upside momentum, following brief and minor pullback observed in the session on Thursday. At the time of writing Litecoin is seen trading up in minor positive territory, with gains of around 1.5%. It is worth noting, since 8th February the price has gained as much as 60%, with the high print up at $53.65 produced on 20th February.

The big chunky jump north came after the price managed to escape a narrowing daily range block formation. LTC/USD was moving within the confinements of this for 11 January to 8th February. The breakout higher was very much explosive, given the prolonged period it has traded within. In terms of the initial spike observed on the 8th, it was a gain of around 45% in a single session.

Coinbase Wallet to Support Litecoin

Coinbase, the leading U.S. cryptocurrency exchange, announced it will now support LTC on their native Coinbase Wallet. This will allow users to store their LTC directly on the app. The fifth largest cryptocurrency by market capitalization will be joining the likes of bitcoin (BTC), bitcoin cash (BCH), Ethereum (ETH) and Ethereum Classic (ETH).

Users of the Coinbase Wallet are going to have the ability to download a required update with Litecoin support in the coming weeks via the Apple Store or Google Play Store. Storing LTC will be immediately available upon the completion of the update. Users will need to choose the ‘Receive’ option; this can be observed on the main wallet page to deposit LTC into the wallet.

In the official blog announcement, Coinbase said:

“The new Wallet update with Litecoin support will roll out to all users on iOS and Android over the next few weeks. LTC support is activated by default — all you need to do is tap ‘Receive’ on the main wallet tab and select Litecoin to send LTC to your Coinbase Wallet.”

Technical Review – LTC/USD

LTC/USD daily chart.

The Litecoin price has stabilized at heights above the psychological $50 price mark. A near-term area of demand is seen from the $50-$47 price range, which is helping keep LTC/USD propped up. The next upside targets for the bulls are seen just above a supply zone tracking from $55-$57. It last traded up at these heights back in November 2018. Should the bulls manage to maintain upside momentum, then eyes will be on a return into $65 territory, where the next area of supply is tracking.

In terms of support, as detailed earlier, immediate relief is found within the $50-$47 range. If this fails to hold, then a potential chunky wave of selling pressure would likely come into play. The next demand area to the downside runs from $42.50-$39.50; price last traded here between 9-16th February. LTC/USD had briefly consolidated within this zone before a further squeeze to the north occurred.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

 Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 126 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Analysis

Crypto Update: Coins Hold Their Ground as Bulls Take a Breather

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The major cryptocurrencies settled down following yesterday’s Litecoin-led pullback, and as the coins respected the key trendlines and support levels, odds favor the continuation of the short-term uptrend. The leaders of the rally remained strong amid the shallow correction, and although the long-term setup remains clearly bearish, the traders could enter smaller speculative positions, still using strict risk management rules.

While the top coins haven confirmed the short-term swing lows yet, the coming days could see new highs, with all eyes on the $4000-$4050 zone in Bitcoin and the $160 price level in Ethereum. The majors still have to form a pattern of higher highs and higher lows on the long-term charts to change the long-term outlook, so our trend model remains on sell signals on that time-frame. That said, the overbought short-term momentum readings are quickly being cleared, so the short-term outlook remains positive.

BTC/USD, 4-Hour Chart Analysis

Bitcoin has formed a bullish consolidation pattern in the past day, and the $3850 level has been clearly supporting the coin, leaving the relatively weak short-term uptrend firmly intact. The MACD indicator is still pointing to an ongoing correction, but our trend model remained on a buy signal on the short-term time frame, and the uptrend could soon resume.

Despite the positive immediate outlook, the $4000-$4050 resistance zone is still very strong, and further consolidation is also possible before a successful break-out. A move above that zone could open up the way towards the $4450 level, but even that wouldn’t change the bearish long-term setup in the most valuable coin’s market.

XRP/USDT, 4-Hour Chart Analysis

Ripple has been trading near the $0.32 support level in the past 24 hours, still being relatively weak compared to its major peers.  The coin remains stuck below the dominant declining short-term trendline that it tested during the recent upswing, and our trend model continues to be on a short-term sell signal.

Below the primary support zone, further levels are found near $0.30, $0.28, and $0.26, while short-term targets for a possible break-out are still ahead near $0.3550, and $0.3750, but traders should still stay away from XRP

Litecoin, Ethereum, and EOS Look Ready to Lead Again

LTC/USD, 4-Hour Chart Analysis

While Litecoin entered a correction after touching the $51 resistance level yesterday, the pullback has been contained so far and even the steep short-term uptrend line remained intact. Given the extent of the recent move higher, even a test of the $44 level would leave the break-out intact.

A move above the primary resistance zone could lead to a rally towards the $56 level, and as Litecoin has been leading the market during the current counter-trend advance, its performance should be monitored closely. Below $44 further strong support is found near $38, and $34.50, and our trend model is back on a short-term buy signal while being bearish from a long-term standpoint.

ETH/USD, 4-Hour Chart Analysis

Ethereum is still trading in a bullish short-term correction pattern near $145, working its way through the overbought short-term momentum readings. The short-term uptrend is clearly intact, and although a deeper pullback is still possible traders could already enter new positions here.

With the long-term downtrend in mind, strict risk management rules are still essential here, even as Ethereum is one of the strongest majors from a short-term technical point of view. Support levels below $145 are still found near $130 and $112, while above $160, the next major resistance zone is ahead near $180.

EOS/USD, 4-Hour Chart Analysis

EOS is still the strongest major from a short-term technical standpoint, and although it continues to be overbought according to the key momentum indicators, aggressive traders could enter positions here. Buying pressure is apparent in the coin, but a deeper pullback towards the $3.50 level is still in the cards. Support is also found near $3.80 and $3, while resistance is ahead near $4 and $4.50.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 470 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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