Monday, March 21, 2011

Dollar Index: Under Control and Moving Along as Expected

The Dollar doesn't seem relevant anymore.  Recent geopolitical events combined with extremes in bearishness and "oversoldness" could hardly get a rise out of the greenback.  Last week would have been the ideal set up to reverse its down trend, but lo and behold, nothing.  The trend remains down.

Figure 1 is a weekly chart of Dollar Index.  The black ovals over the price bars are key pivot points, which are areas of the most important buying (support) and selling (resistance).  When we last looked at the Dollar Index, I felt that there was a strong possibility of significant downside (click here for article), and I suggested that a weekly close over the key pivot point at 76.65 would nullify this set up (click here for article).  Two weeks ago prices did close over the key pivot by 13 cents but last week, prices closed below this level.  This is a close below a support level and this should lead to selling.  The next level of support is at 75.30.

Figure 1. Dollar Index/ weekly

The inability of the Dollar Index to serve as the "safe haven" currency during times of crisis is rather telling.  In particular, with investors extremely bearish on the greenback, last week would have been an ideal time for a strong counter trend bounce.  But nothing developed.  

While a lower Dollar has equated to rising equity prices over the past couple of years, I have to wonder at what point that relationship will no longer hold.  Remember, devaluing one's currency is not a road to prosperity, and inflationary pressures should be strong headwinds for equities.  However, one thing this current Dollar down trend has in it's advantage is that it seems to be occurring at a rather measured pace.  "Things" remain under control and moving along as expected. 

In sum, support and resistance levels are fairly clear with the Dollar Index; downside risks are substantial although the pace of devaluation appears to be manageable.


hettygreen said...

You are right about the Dollar. No one seems to care anymore. Sounds like stocks circa 1982.

the bonocelli said...

hahaha...why would we care about the dollar when we know and have been promised that prosperity is returning. Sombody will fix the mess...I'm sure of it!!

BTW...74.98 is my drop dead zone. If it passes that...well party on Garth!! Inv HS (complex) also setting up...maybe.$USD&p=W&yr=20&mn=0&dy=0&id=p21446275991&a=222450495&r=8021&cmd=print

Thanks for the regular updates. You do a great job and I always look forward to your writeups.

Guy M. Lerner said...


Thanks! I could do more if I had the time!!!

I heard Larry Kudlow talking about "King Dollar"; the show reminded me of a bunch of dinosaurs; sort of like Larry King interviewing Phyllis Dillar

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