Wednesday, May 11, 2011

The Dollar Index: Making A Stand

The Dollar Index is making a stand.
Figure 1 is a weekly chart of the Dollar Index (symbol: $DXY).  The red colored  price bars are positive divergence bars.  In this case, I am looking at the divergence between a momentum oscillator, which is moving higher, and price, which is moving lower.  Positive divergence bars tend to show up at market bottoms, but in and of themselves, they are not an absolute sign of a market bottom.  Positive divergence bars signify slowing downside momentum, and from a technical perspective, the highs and lows of the positive divergence bar will serve as a trading range for future price movements.  A close over the highs of the positive divergence bar will lead to a reversal of trend, and a close below the lows of the positive divergence often means accelerated selling as those traders expecting a reversal close their losing positions.  So in a downtrend, a close below a positive divergence bar will lead to continuation of that down trend.

Figure 1. Dollar Index/ weekly

Last week's price bar is a positive divergence bar; therefore a weekly close over the highs implies a high likelihood of a trend reversal (from down to up).  A close below the lows would likely see increased and accelerated selling.  The high of this positive divergence bar is at 74.93; the key pivot point at 75.30 is another important area of resistance.  

Failure at this juncture would be heralded by closure below the lows of last week's positive divergence bar at 72.83.  Once again, accelerated selling is expected as the Dollar Index falls out of the trend channel.  If this were to happen, I would expect to see prices break through their all time lows.
Previous and recent articles on the Dollar Index can be found here:

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