A super deal on the U.S. dollar

Traders have slashed the price of the U.S. dollar. And that’s terrific news! Now you can get your hands on greenbacks far cheaper than you could only two weeks ago.

If you are a regular reader, you know that my long-term theme is that the dollar will climb sharply through most, if not all, of 2009. And now’s certainly not the time to deviate from those expectations.

Let me explain …

One Head, Two Shoulders, and
Some Juiced Dollar Bears

The recent move against the buck wiped off roughly 9% in 9 days—that’s a bunch! At the same time, the dollar tore through multiple support levels on the charts. And while I had expected the dollar to correct, the decline was deeper and faster than I thought we’d see.

The volatility in the U.S. Dollar Index is at record levels. Just take a look at its weekly chart below.

At the bottom of the chart, in blue, is the Average True Range. This represents the Index’s daily trading range from high to low. As you can see, it is now well above where it has been over 12 years.

And I expect these huge moves will continue.

The initial catalyst for the two-week assault on the dollar had a lot to do with the technical picture. Traders keyed in on a common reversal pattern rearing its head in the U.S. dollar daily chart shown below.

This pattern delivered exactly what it had forecast … and then some. If you acted on this signal, it paid off. But now this same chart is throwing off another signal, in the opposite direction, that will likely pay off equally as much. I’ll explain in a minute.

First, let’s look at the market rationale for this sell-off in the buck, beyond the technicals …

Fed-Speak Added Extra
Momentum to the Dollar’s Fall …

On Tuesday, the Federal Open Market Committee opted to go beyond consensus expectations. Instead of dropping 50 basis points to 0.50%, they targeted a range between 0.0% and 0.25%.

The Fed said it will do whatever is necessary with monetary policy in restoring order to financial markets and shoring up the U.S. economy. That includes purchasing any asset from anyone at anytime if said asset is causing financial stress.

The Fed’s words added fuel to the inflationary fire-breathers. These pundits are pointing at the inflationary impact of the drastic measures being taken by the Federal Reserve and U.S. government.

They believe that if the Fed succeeds in propping up the economy, it’ll happen by re-inflating asset prices. And by that time excessively easy money and easy credit is going to knock down the buck’s value.

Hence, the dollar’s big sell-off.

I think these people are looking too far out at this point. And that means the dollar sellers overreacted. Two reasons why …

1. Deflationary forces impacting the global economy appear too strong to be counteracted by Fed policy in any reasonable amount of time. In other words, the stimulus isn’t going to bring back a recognizable boom. The recovery process will take some serious time.   

2. The global economy is shifting quickly, and the rest of the world is lagging the U.S. downturn. When stabilization of financial markets and the U.S. economy does finally occur, there’s a good chance the U.S. will be looked upon more favorably than many other comparable players in the global economy.

So This Is the Super Deal
You’ve Been Waiting For …

Right now, buying the dollar might offer the clearest and most profitable opportunity we’ll see for quite some time.

Have a look …

I’ve circled three price bars in the above chart. When such a three-bar pattern occurs at a significant intermediate-term low, it generally represents a key daily reversal pattern. Based on each part of each bar — open, high, low, close — you can see how the bulls have overtaken the bears.

So what had been strong momentum for the bears has turned on a dime.

After pushing to new lows with the second bar, sentiment changed dramatically that same day and became bullish with a close above the close of the first bar. Confirmation of this sentiment change occurred with the third bar closing above the high of the second bar.

Is this a Holy Grail trade setup? No. But given the bullish fundamentals, this new technical pattern tells me that there couldn’t be a better time to own dollars.