Monday, November 9, 2009

Dollar Index Technicals

Figure 1 is a weekly chart of the US Dollar Index (symbol: $DXY). The pink labeled price bars within the ovals are positive divergence bars.

Figure 1. $DXY/ weekly

The US Dollar Index remains in a downtrend. However, a weekly close above 76.58, which is the high of the recent positive divergence bar, would nullify that down trend, and in all likelihood, the Dollar Index would trade in a range. A close above the pivot at 79.46 would turn the down trend into an uptrend.

A weekly close below the low (75.20) of the current positive divergence could lead to an acceleration of the down trend as those anticipating a trend reversal give up their losing positions. This is the "this time is different" scenario but in reverse.

Some of the prior articles on the Dollar Index, which explain some of the strategies that I use to arrive at these conclusions, are located here:

The technical picture for the Dollar Index is pretty straight forward. And while "everything under the sun" goes up when the Dollar goes down, it is still my contention that commodities will out perform equities if only because in this liquidity driven environment equities will be prone to sudden sell offs. As a reminder, you may want to review the article "The Inflation Indicator Meets The "Dumb Money" Indicator".


Dave Narby said...

Excellent as always.

I have a feeling dollar bears are going to be surprised when CRE implodes, creating another deflationary event.

Gold should do OK, but I think other commodities are going to get whacked (in dollar terms).

Ah... Timing.

Guy M. Lerner said...


Thank you!

The down trend in the Dollar remains consistent with prior down trends and it appears that there is some way to go at least from a time perspective.

One other thought that is rarely talked about: low rates and a sinking dollar have become a double whammy on Main Street; not only has Main Street bailed out Wall Street but because of current policies, easy money -with destruction of the dollar and rising inflation - will create further burdens on Main Street. Wall Street is happy-- free money, sinking dollar- all this is good for equities in a relative sense. Main Street will suffer sometime in the future. Now you can say that is capitalism but it is more like an unfair advantage; we are rewarding bad behavior and encouraging the same all over again!!