US Dollar Index: Still Bullish

My reluctance to embrace the rally in gold has been well documented. One of the reasons, I did not jump on the gold band wagon was the strength in the US Dollar Index. Since August, 2008, it has been my belief that the US Dollar was poised for a secular change in trend and that gold has only been in a range. Based upon this, it remains my belief that the US Dollar is a better place to invest.

As an aside, my premise of the US Dollar being a better investment than gold is not too far off. Since August 31, 2008 gold is up about 15% (with a lot of volatility), and the US Dollar is up about 13% (with a lot less volatility). Seems like six of one half dozen of another kind of thing.

So let's leave gold aside for a moment (as I don't know anything anyway), and let's focus on a monthly chart of the US Dollar Index. See figure 1. The US Dollar Index is up strongly this morning as the green back has become a safe haven during these times of global economic duress. Yet, in this environment of currency devaluation, it just doesn't make sense that the Dollar is higher. Higher gold we can understand; gold is a store of value. But a higher US Dollar?

Figure 1. US Dollar Index/ monthly

Yes! And I think the US Dollar is going even higher. The question becomes: how high?

Historical back testing shows that most moves in the US Dollar end with a negative divergence between price and a momentum oscillator. These negative divergences are noted with the pink markers on the price bars in figure 1. While the most recent price bar is not a negative divergence bar, higher prices will likely lead to a negative divergence over the next 6 months as the oscillator used to define the negative divergence is unlikely to confirm the higher prices.

It is my guess - and only a guess - that the Dollar Index could trade as high as $91.57. Returning to figure 1, this is the next level of resistance as defined by the prior pivot point high and negative divergence bar. Certainly, Dollar weakness has been a much touted event, and maybe at this level (i.e., a double top), the US Dollar Index will falter.