Dollar Reflects Off Resistance

Mar 28, 2008: 12:01 AM CST

The US Dollar Index continued its downtrend recently, by failing to overcome resistance via the 20 day moving average.

The 20 period moving average (especially along with the 50 period moving average) has provided a barrier that is too significant for the ‘dollar bulls’ to overcome with any lasting success.

The recent rise (counter-trend swing) was a little surprising, given the timing, and further complicates the news/profit relationship. The Federal Reserve cut interest rates .75 last Tuesday, which is a move that is traditionally bearish for the US Dollar Index because it makes our currency less attractive to foreign investors. Nevertheless, the dollar rose sharply following this announcement. Of course, this news was already factored into the price by the market participants, so it should have been surprising to the astute market trader.

Nevertheless, until proven otherwise, the US Dollar Index continues its pathway to new lows.  Short-term, however, a positive momentum divergence has formed on this recent price swing down which could temporarily contain a bit of severe bearish action.
The weekly chart is a picture-perfect example of why trends have greater odds of continuation than of reversal, and how moving averages can structure trades and risk-management points:

Notice the structure of the moving averages – they are in the most bearish orientation possible.

Notice how price has been unable to breach the falling 20 week moving average with any conviction at all. Until price shows some consolidation, I would base my inter-market work on the notion that the dollar is weak and will likely continue to deteriorate for an unknown duration into the future (according to the chart structure).

As a nation’s currency is usually indicative of the health of that nation, what does that potentially say about the current state of affairs in the US Economy?

7 Comments

7 Responses to “Dollar Reflects Off Resistance”

  1. J. Livermore Says:

    Newer price low on the daily accompanied by a positive momentum divergence. That’s short-term bullish, not bearish.

  2. Anonymous Says:

    Corey,

    Nice clean analysis. What parameters are you using for momentum.

  3. Corey Rosenbloom Says:

    J.

    True, and I debated whether or not to highlight the positive divergence (daily), so I went back and made an addendum note to it without drawing it on the chart. It is a short-term development that doesn’t – alone – invalidate the negative trend structure. Excellent observation!

  4. Corey Rosenbloom Says:

    The momentum oscillator is the standard MACD indicator tweaked with settings 3, 10, 16. It is the difference between a 3 and 10 EMA smoothed by a 16 period value.

    Thank you for the comment.

  5. Klauden Says:

    Hi Corey, The above J. Livermore[very suspect name, btw]
    is correct. In fact, it would not be surprising to see one
    hige short $USD squeeze tanking XME.XLE, DBA etalia accom
    panied by a huge market rally into the GeneralElection.
    Hmm, you saw doubtful. There is nothing doubtful with Sec.
    Paulson at the helm! klaudenhemet-
    Keep on blogging/trading-you’ve taken the correct fork in
    the road. Best Wishes-

  6. Corey Rosenbloom Says:

    Hi Klauden,

    I could certainly see a massive short-squeeze develop in this index, and a subsequent market rally. According to cycle theory, election years are supposed to be positive anyway (for a variety of reasons), and so it would be quite uncharacteristic if this one were not.

    A stronger dollar will indeed send oil, gold, and other commodities lower. I know that will encourage the Fed when many have been suggestion stagflation may be returning. A drop in commodities could indeed cause a rally in the market. I love how all the markets tie together so intricately.

    Thank you for the comment!

  7. Anonymous Says:

    Good job with the analysis. My feeling is that the stock market will not find a stable bottom until the u.s. dollar finds a bottom. It looks like it might be trying to do that. If 71 holds as support it may be forming a base.