The Dollar Index And McDonald's Corporation

It is no secret that the Dollar Index (symbol: $DXY) is under pressure as concerns are mounting that the only way out of our debt dilemma is for our government to devalue the currency.

With a monthly close below the simple 10 month moving average, my Dollar trading model is set to give a sell signal. I first went bullish on the Dollar Index back in August, 2008. Although the model is generating a sell signal, the real question that I have on my mind is what kind of downside pressure we shall continue to see in the Dollar Index in the coming months.

First, let's say I would become constructive on the Dollar Index on any monthly close greater than the simple 10 month moving average. However, any gains following such an event would likely be sub-par as the technical and secular winds currently are not in the Dollar's favor. That's the easy part.

The hard part is assessing how fast and how low the Dollar Index can go once we get the current sell signal. Figure 1 is a monthly chart of the Dollar Index, and for "practical" purposes -because everyone will be watching - we can use $80 as our current line in the sand. As I write, the Dollar Index is right at $80. The previous thrust up (labeled with red down arrows) is a lower high, so the move from August, 2008 to May, 2009 appears to be a cyclical rally in an ongoing secular bear market. Based upon this, I would look for a break of $80 and test of the lows at $71.

Figure 1. $DXY/ monthly

A weekly chart of the Dollar Index is shown in figure 2, and this quasi -head and shoulders top is shown. The neck line is at $80.74, and this should continue to provide resistance. A projection of this pattern will take prices to the $71 level.

Figure 2. $DXY/ weekly

While the Dollar Index was getting smacked last week, McDonald's Corporation (symbol: MCD) was bucking the trend of the overall equity market and rocketing higher. MCD was up almost 7% for the week on very little news. There was an analyst upgrade from Deutsche Bank AG citing “compelling valuation” and “attractive” cash flow. Maybe this was his way of saying that McDonald's would benefit from a falling dollar.

As an aside and for newer readers to this blog, McDonald's is a stock I have been following since the beginning of the year when I identified it as "dead money" despite the accolades and cheerleading over at CNBC.

A monthly chart of MCD is shown in figure 3. A monthly close above the pivot low point at $57.93 would be bullish and reverse the bearish trend. A monthly close above $62.19 would be uber-bullish and likely launch MCD on a long bullish trend. MCD has been consolidating in a tight range over the past 18 months and this represents an appropriate launching pad for a bullish run.

Figure 3. MCD/ monthly