Tuesday, October 6, 2009

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.


dacian said...

thanks guy, and this is in sync with your gold analysis; as dollar sinks gold might go higher. Let's see how this plays out.

I was having a hard time following you lately with your calls on equities; we had:

1. dumb money is bull which usually means lower prices (this wasn't the case lately)

2. leveraged rydex bulls are all in; we want to bet against these people, but lately didn't really work.

3. trend is your friend (7 times in the last months when there was a -2.5% correction we saw higher prices over the next week), which is somehow contrary to the 2 previous points (although a short term trading); but we can make the case for 9th, 10th, etc. time when there is a -2.5% correction.

4. this is not the launching pad of a new bull market, yet S&P500 is up more than 50%.

Quite difficult market to say the least, traders completely ignore reality; it seems like the US is doing currently a magic thing (no nations did it, but they try hard to succeed): devalue their way to prosperity.

Thanks for the post and keep the good work!

Guy M. Lerner said...


Thanks for the feedback...I try very hard to be clear and consistent over time so if I am not, please let me know.

For the past 8 weeks or so, I have ended every sentiment commentary on Sunday with the same idea: 1) there is an upward bias until the extremes in sentiment are worked out 2) this would be one difficult market to short.

I can expand upon this a little bit more and suggest that this market is for renting --not owning ---only. Without a major correction (> 8% on SP500 ---nothing special about number) there is too much risk in my opinion. Furthermore, the lackluster volume on up days and greater than average volume on down days is problematic. Rent don't own....

With regards to the "launching pad to a new bull market, yet S&P500 is up more than 50%), I had my market mea culpa moment already; see this link:


Appreciate the feedback and discourse!!

dacian said...

"Without a major correction (> 8% on SP500 ---nothing special about number) there is too much risk in my opinion."

Do you mean it's too risky to go long before a 8% correction? That would make dumb money go bearish which implies there is less risk going long, correct?

I'm a bit frustrated with smart money being neutral for so long...