by Guy Lerner, Guest Author. More information at end of article.The last two weeks have seen a significant move up in the U.S. Dollar Index. The question now is: What’s next? That is a difficult question with a very important answer. The following analysis explores some of the critical points in the coming days (or possibly weeks) which will provide information about the answer.
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
Click on graph for larger image.
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 at The Technical Take: April 13, 2011 and March 21, 2011.
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Guy Lerner is the managing partner of ARL Advisers, LLC and the publisher of The Technical Take blog. ARL Advisers, LLC offers a tactical asset allocation strategy that is strategic, balanced, and targeted. His blog offers technical and quantitative insights on the equity, bond and commodity markets.
