The thing I like best about monthly charts is that they don't change all that often. Once established, trend signals tend to play out more or less as expected over a long period of time. Recently we've seen major (long-term) downtrends extended in both live cattle and feeder cattle, as expected by those looking at nothing more than monthly charts. Grains, on the other hand, remain in holding patterns waiting to fulfill earlier bullish signals (corn).
The fate of the commodity sector, and technical patterns for a number of markets, could hang in the balance of the Federal Reserve's decision on whether or not to raise interest rates scheduled to be announced early Thursday afternoon (1 pm CT). I've been asked a number of times what I think the result will be.
As most of you know I'm not an economist, nor do I play one on television. I didn't even stay overnight at a certain hotel chain that suggests you get smarter by having a good night's sleep at one of their establishments. No, I'm but a lowly technical analyst reading the mystic market tea leaves known as price charts. And what I see regarding the Federal Reserve is the same thing I've seen since the Fed passed on raising interest rates back in March.
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The key market fundamental for the U.S. dollar index (USDX) is U.S. interest rates. Yes, there are other things going on like global economic policies and what not, but the driving force in the USDX remains the action of our own Federal Reserve. And as the USDX long-term monthly chart shows, when the Fed passed on rates last March a major top was established at 100.390. The immediate reaction was for the USDX to fall to 93.133 in May, a test of support at 93.383. This price marks the 23.6% (Fibonacci) retracement level of the uptrend from 70.698 (March 2008) through the March 2015 high.
From May through July the USDX consolidated between this support and resistance at 98.677, the 76.4% (Fibonacci again) retracement of the initial March to Ma selloff. Then came August, where the USDX moved above the July high of 98.151 and below the July low of 95.454 before posting a lower monthly close. Those familiar with this blog will recognize that pattern. Go ahead and name it, I'll wait...
Okay, those of you who said "bearish reversal" are partially right. Since it didn't go to a new high, the August activity looks to be a bearish outside month, confirming the spike reversal seen back in March and April. In other words, the major downtrend that was indicated then seemed to be gaining momentum.
Speaking of which, monthly stochastics (bottom study) are also growing more bearish. If you trace your finger back to March, the same month the USDX posted its 100.390 high, you'll see that monthly stochastics established a bearish crossover above the overbought level of 80%. In other words, the faster moving red line crossed below the slower moving blue line, with both well above the 80% level. This again would indicate/confirm the major trend had turned down.
So where does that leave us heading into Thursday's announcement? The long-term downside target for the USDX remains the area between the 33% (Dow Theory) and 38.2% (Fibonacci) retracement levels of 90.503 and 89.048. Realistically, the only way to get there is for the Fed to hold off again on raising interest rates. Talk heading into Thursday's announcement is already targeting an October move that would seem to fit with the normal October collapse of the Dow Jones Industrial Average (more on that later).
Given what I see on the charts I'll stick with my idea that interest rates will stay unchanged and the downtrend in the USDX will accelerate. Let's see what happens.
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