Dollar Index Rolls Over

May 24, 2008: 4:09 PM CST

Some traders imagined new life for the US Dollar Index, and while that may be the case long-term, in the short-term, the Index has created a false breakout only to roll back to the downside and could make new lows.

Let’s look at the daily chart:

While a positive momentum divergence did precede the breakout of the 20 and then 50 period moving average… price rolled over to shatter both averages once again, and is poised to test prior lows and could exceed those lows.

A negative momentum divergence preceded the break beneath these averages.

What clues could the weekly chart have told us to help with our forecasting?

Although price may have looked strong on the daily chart, we see that price merely made a clean price swing back to the falling 20 period weekly moving average, which has served as significant resistance over the last few years.  In fact, for FOREX traders, this could have been an elegant entry into some of their favorite currency pairs as the structure turned back down to form a price swing to the downside.

Price is coming off a new momentum low, which could also forecast lower prices are yet to come.

Also, the trend of the dollar is important not only to FOREX traders, but for commodity traders, as we saw the $CRB Index notch yet another weekly all-time high on Friday, thanks in part to Crude Oil’s stratospheric rise this week.

Continue to watch the set-ups and structure of the Dollar Index for potential intermarket relationship trades or investments.  Check out the Market Club for signals, commentary, market scans, and information.

2 Comments

2 Responses to “Dollar Index Rolls Over”

  1. Ellis Bouchard Says:

    Hi Corey, I hope your enjoying the long weekend. I have observed from time to time the tendency for equities/Indices to retrace to a shorter term moving average(10 or 20 DMA)while at the beginning of a trend and as the trend is getting tired or ending a move back to a longer term MA (200DMA) before a trend change. Can you substantiate this?

  2. Corey Rosenbloom Says:

    Ellis,

    You’re right. Momentum precedes price from the shorter time frame to the longer, and action precedes action from the shorter to the longer. When a trend is fresh, it has a tendency to make fewer and shallower pullbacks, but it does so to shorter moving averages. As the trend matures and is about to consolidate or turn, it will retrace to deeper moving averages. When these averages (say the 200 day) are penetrated, odds are that the trend has reversed and will begin a new downtrend.

    Remember that this is a tendency, and not a hard and fast rule. It’s indicative of the supply/demand relationship slowly shifting as time progresses.

    Thank you for the comment!