Dollar Index: The Technical Take

Let's get technical on the Dollar Index (symbol: $DXY). A weekly chart is shown in figure 1.

Figure 1. Dollar Index/ weekly

The price bars in blue represent positive divergence bars between price, which is heading lower, and a momentum based indicator used to measure price, which is heading higher. Positive divergences generally represent slowing price downside price momentum and often are a harbinger of a change in trend. In other words, traders position themselves for a possible trend reversal at the presence of these positive divergence bars.

But what happens if the reversal never comes? What happens if the market trades below the lows of these positive divergence bars? Just like we see an acceleration of higher prices to the upside with negative divergence bars - see the article on the "this time is different scenario" - we can also see an acceleration of prices to the downside as traders unwind losing positions.

So that is what is at stake for the Dollar Index here. I wrote about this technical set up in the article "This Time Is Different (In Reverse)". When there is a close below the low of a positive divergence bar in the Dollar Index, losses can accelerate. If this were to occur, prices are likely to fall to the April, 2008 lows around $71 to $72.

So let's summarize. A weekly close below the lows of the positive divergence bar at 76.49 is likely to lead an acceleration of prices lower. A close above the highs (77.33) of the positive divergence price bar would result in the down trend being stymied. A weekly close above the pivot low point at 79.46 would likely result in a new up trend.