The Four Horsemen - The US Dollar

There were four big setups, each covering multiple tickers, that I was looking in my bi-weekly The Bigger Picture webinars last year and at the start of this year that looked very strong, but I was struggling to come up with any decent fundamental reasons why they might play out.

That changed when the US attacked Iran on 28th February, and I have since written two posts on the (very bullish) setups on the oil charts first on 3rd March, and after the first phase of those bottoming setups had all made target, with a follow up on 13th March. As these patterns were all at the bottom of decent quality bull flags from the 2022 highs, I am still expecting to see full retests of the 2022 highs on all of $WTIC (Light Crude Oil), $BRENT (Brent Crude Oil) and $GASO (Gasoline), with $HOIL (Heating Oil) having already reached that target.

I’m going to assign this bullish oil setup as War, as those are the first of these four horsemen, as I’m thinking that all four of these big setups may make their targets over coming weeks and months. They may not of course if the war is successfully ended soon for whatever reason, but at the moment that seems doubtful, and there seems a very strong possibility that this conflict may persist and widen over the next few months, with an oil shock that may be larger than the big oil crisis in the 1970s.

I’m going to do posts on each of these remaining three big setups over the next few days and they will be as follows:

1. Pestilence - The US Dollar

2. Famine - Wheat, Corn and Cotton

3. Death - Bonds

The horseman assignments are a bit whimsical, but the first in the sequence is obviously War, and oil was the first setup to move seriously. Wheat & Corn are obviously Famine. The Bonds setup is so alarming I have assigned that as Death, so the US Dollar gets Pestilence as the one remaining.

Today I will be looking at the very bullish setup on the US Dollar (USD) into a retest of the 2022 high at 114.78.

To a large extent this looks similar to the bullish setup on the oils when I wrote that first post on 3rd March, as we see the same bull flag from the 2022 high, and reversal patterns from the lows over the last few months that have not yet delivered.

I wrote a post looking at this setup last year on 26th June, and in more detail than I’ll be showing today, so if you want to see the full setup including the strong supporting patterns on EURUSD and GBPUSD that is worth a read. I was saying then that US government policies were not looking particularly USD friendly, and we might instead see the setup break down, and the double bottom that I was looking at on the USD daily chart then subsequently broke up and failed back into the lows in January, which had me wondering about a possible break lower again. From the January low there was a modest rally into the end of February.

What was very interesting though was what happened at the start of the Iran War. Stock markets fell after the war started, which is normal, but what we would usually have also seen is bonds and golds going up in a flight to safety trade. That didn’t happen, with both of those falling, but what did go up in response was USD, which rose (low to high) about 2.5% in what appeared to be a flight to safety trade.

Now that is very interesting, as we have seen something like this happen before, back in 2022 in the months after Russia invaded Ukraine.

I’m thinking the whole bullish setup may play out over the next few months into a retest of that 2022 high at 114.78, and to show you why, I’m going to start with a close look at USD in 2022 after Russia invaded Ukraine on 22nd February.

If you look at the chart below you can see that there was a very strong reaction on oil prices after Russia invades (green background on the chart) which was at about $90 on $WTIC before the invasion and peaked at $126.42 on 7th March. This was a very modest oil supply shock however compared to the current one.

Given that oil was already at $90 before the invasion the impact on inflation was modest and prices had returned to the $90 area by July. Post-COVID inflation was already hitting 7.9% in February 2022 and peaked at 9.1% in June.

What was interesting though was what happened on USD, which was at about 95.5 at the time of the 2022 invasion, and then started a very strong move up into the 114.78 high in September. Given that USD was at 97.25 at the start of the Iran War, it would take a smaller move on USD now to retest that high.

USD daily chart (2021 through Jul 2023):

So let’s have a close look at this very bullish setup on USD now. Looking at my main USD monthly chart going back to 1980 you can see that the bear market from the 1984 high at 164.72 fell in a falling wedge into the 2008 low at 70.70. From there there has been a rally forming a high quality rising megaphone into the 2022 high at 114.78, slightly under the 50% retracement of that bear market which would have been at 117.71. This looks like a large bear flag setting up a retest of the low, over the next decade or two, in the 70.70 area.

I’ll look at the setup in more detail on the weekly chart but from the 2022 high a clear bull flag falling wedge has formed with the obvious next target in this sequence at a retest of the 2022 high, probably to make the second high of a double top.

This was the setup I was looking at last year and it is a strong setup, supported by matching bear flags on EURUSD and GBPUSD and a monthly RSI 5 buy signal on the USD chart. There have been twelve of these monthly buy and sell signals on the chart below since 1980, eleven made at least the minimum target at the 70 or 30 level respectively on the RSI 5, and the other made the possible near miss target in the 35 area. This really is a very strong setup on a very technical chart.

USD monthly chart:

On the weekly chart you can see the high quality rising megaphone from the 2008 low, which broke down slightly last year and a bit more this year, so as ever when this happens I’m looking for a topping setup to form. There is no obvious H&S neckline apart from on at 88.25, which is really too low to form a decent pattern, so the obvious pattern to form here would be a double top.

From the 2022 high a high quality bull flag setup has formed and with the small double bottom that has formed with the lows in the last few months the obvious next move is to break up towards the retest of the 2022 high.

USD weekly chart:

On the daily chart you can see the double bottom that broke up last year and failed back into a retest of the low in January, and the larger double bottom formed by that failure and low retest has now broken up with a target in the 104.572 to 105.239 range. Given the overall setup and the 2022 analog I am thinking this double bottom will likely reach target in coming weeks and should then continue into the obvious larger target at 114.78.

Since the last short term high at 100.54 USD has backtested the daily middle band and may be ready to go higher directly, but there is a short term fly in the ointment, with a daily RSI 5 sell signal that fixed at the recent highs. There have been ten of these sell signals since June 2022 with seven of those reaching the full target at 30 on the RSI 5 and the other three reaching the possible near miss target in the 35 area. This retracement has only reached the 40 level, so I am wondering if another modest leg down on USD may be needed for this to reach the possible near miss target, though some sideways churn could manage that instead.

USD daily chart:

On the DX hourly chart there is a decent quality bull flag formed from the March high that could be ready to break up, but the fixed daily RSI 5 sell signal has me wondering whether this needs another leg down first.

DX Jun daily chart:

Overall this is a very strong setup and, unless peace unexpectedly breaks out in the next few days, likely has a good chance of playing out over the next few weeks.

I would note that if USD does make target it does not necessarily need to form the second high of a double top there, though I think that is likely. If it overshoots a bit then I’d be watching the 50% retracement level at 117.71 for resistance.

The next post in this series will be looking at the bullish setups on Corn, Wheat and Cotton. Everyone have a great weekend. :-)

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There Is No 'I' in 'TACO'

The Iran War and the US equity markets have reached an interesting stage and I am watching with great interest to see what happens next. I’ll be reviewing the setup on equities here mainly but first I’ll review where we seem to be on the Iran war.

I was saying in my last post on Thursday 12 March that Trump had a problem in this crisis in that if he wanted to TACO here, likely by declaring victory, withdrawing US forces and moving on to something else, then the problem was that this would necessarily require some kind of agreement with Iran, and Iran, under new, younger and much angrier management, was showing no interest in talking.

That’s still the case as far as I can tell, with Iran insisting that hostilities will only cease when the US close all their bases in the Persian Gulf, and agree to pay reparations. That seems unlikely to be an acceptable outcome from the US perspective.

What complicates this further is that it seems that the US allies in the Persian Gulf are now insisting, after many and serious attacks on them by Iran during the war so far, that the US stays and finishes the job, either toppling the Iranian regime or degrading their military capabilities to an extent where they were incapable of further attacks. I understand that they may be threatening, in the event that the US pulls out without this, to end all current agreements to invest in the US and might potentially then also close all the US military bases in the Persian Gulf allies.

Trump and/or Israel have already attacked a desalinization plant in Iran and Iranian oil infrastructure since the war started and Trump was threatening over the weekend on Truth Social to bomb all the civilian power plants in Iran. Iran responded that in that event Iran would bomb the desalinization plants and oil infrastructure in the Persian Gulf States. If they were able to do that on a large scale that might well trigger a major multi-year world energy crisis while making much of the Middle East uninhabitable due to a lack of drinking water.

So the obvious course would be to continue the war until the regime in Iran is toppled and replaced with a friendlier one? Possibly but if that was to involve a ground invasion that would not be at all popular in the US, Iran has a population twice the size of Iraq and a geography that makes it considerably easier to defend than attack, except by air of course. This could develop into a Vietnam scenario.

Iran has been successfully invaded before, as the British and Soviets invaded from two sides and conquered (neutral) Iran in 1941 in a three month campaign, drove out the first Pahlavi Shah and replaced him with his son with the agreement to withdraw after the end of WW2. I would note though that the only other two previous successful wars of conquest against Iran I can find in the last 2700 years since Iran became a recognisable state were the the conquest by Alexander the Great in the 4th century BC and the Islamic Caliphate in the 7th century AD.

There are no obviously good options here, but the consequences if this war goes badly are clear. The worst case is that the world is plunged into an energy crisis that would dwarf the 1970s energy crisis, considerably reduce world growth, and be highly inflationary. That would likely be very bad for US equity indices and asset prices generally.

On to the markets where on the H&S on SPX that I was saying in my last post had broken down with a target in the 6540 area reached target on Friday. I mentioned then that this target was also close to a possible larger H&S neckline in the 6522 area and that was also hit on Friday.

This is a big level on SPX and an area where we could see a possible right shoulder rally before SPX could break down further towards the 4900 - 4950 area. Could we do that in a week? Probably yes, with an ideal right shoulder high target close to short term resistance at the daily middle band, currently in the 6757 area.

SPX daily chart:

There is another very big level being tested here on the weekly chart and that is the 50 week MA. That is currently at 6483, and the low on Friday was a solid test of this MA, which tends to be a key support area in uptrends and a key resistance area in downtrends.

SPX weekly chart:

There is further reason to be looking for a bounce here on QQQ, as the 3sd daily lower band was tested at the low on Friday. This will generally deliver a bounce and, if we see one, the daily bands should widen further to allow further and faster downside, as they already have on SPX, DIA and IWM.

If we see that bounce and then further downside I would note that the large double top setup that I mentioned in my last post has now broken down with a target in the 523-4 area.

QQQ daily chart:

On DIA the H&S that by my last post had already broken down towards a target in the 449.50 area has not yet reached target, but it has reached the 455 area. I have two possible larger H&S necklines on the chart below and they are in the 455 and 451 areas, so the higher neckline has been reached, so a rally from Friday’s low could be a right shoulder forming on a larger H&S that on a break down would look for a target in the 405 area.

Could we make that right shoulder in a week? Probably yes, with an ideal right shoulder high target close to short term resistance at the daily middle band, currently in the 475 area. A daily RSI 5 buy signal also fixed yesterday.

DIA daily chart:

On IWM an H&S has now formed and broke down on Friday with a target in the 216 area. A strong rally after the break down is common but of course a break back over the right shoulder high at 257.19 would invalidate this H&S. A daily RSI 5 buy signal fixed yesterday.

IWM daily chart:

A decent rally this week during Trump’s five day pause could therefore set up all four of these big US equity indices to go a lot lower, and the technical setup for that rally looks very promising.

There are a few potential bumps in the road with this scenario however.

1. There don’t appear to be any actual ongoing talks between the US and Iran.

2. Israel is still actively attacking Iran.

3. Iran is still actively attacking US allies in the Persian Gulf.

4. I am reading this morning that last night the US and Israel attacked a desalinization plant and a civilian gas line in Iran which are precisely the kind of targets which may escalate this war in the worst possible way.

We’ll see how this develops, but overall I am wondering if we may watching the start of a crash scenario developing here where all of these indices retrace the entirety over their moves up from the April low last year.

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