New Life for the US Dollar Index?

Feb 8, 2008: 9:42 AM CST

Could the US Dollar Index be forming a bottom? That is the $64,000 question, no doubt, but the index which has been marked down to new lows is now showing early signs of potential strength.

Make no mistake, the US Dollar Index is in a confirmed daily (and weekly) downtrend, but price has managed to create a higher low and could be on its way to creating a higher high.

The higher low came at $75, after price settled and reversed above its prior low at $74.50.

Although the moving averages are in the most bearish orientation possible (20 beneath the 50, beneath the 200), price is indeed currently above these levels, and has broken above briefly three times since December.

A momentum divergence has also formed which is being resolved currently.

The odds may be shifting currently to the more bullish (US Dollar Strengthening) case, but the index still has a bit more convincing to do before we can call a new potential daily uptrend. The odds still favor lower index prices until the uptrend shift is complete.

Let’s look at the weekly chart for more insight:

Does your bullish perspective shift more bearish when you view the strength of the downtrend on the weekly chart?

We see price testing the falling 20 week moving average, which has served as key resistance throughout the entire downtrend.

I have drawn the arrows where this average served as key resistance. Only once did price pierce the average (October, 2006) but the 50 week average served as key resistance at that point.

The swings are narrowing, indicating that a period of consolidation may be ahead, and price could break above the key average, but the 50 sits just overhead like an ominous cloud on the otherwise bright horizon.

With the Federal Reserve still on a pathway to lower interest rates, the US Dollar Index may still continue its weakness until the Fed shifts its “easy money” policy.

3 Comments

3 Responses to “New Life for the US Dollar Index?”

  1. John Forman Says:

    Corey – While I go along with most of your analysis I would contest one point. To my mind we don’t have a confirmed higher low yet. I mean the current pattern is one of lower highs and lower lows since mid-December. I think we need to see that pattern break before we can say the most recent low is really the low and thus we are at least into the process of shifting the pattern toward a potentially bullish one. Of coure it could just go sideways for a while.

  2. Corey Rosenbloom Says:

    John,

    I try to view the price action from a price-swing perspective, and note not only the higher/lower highs/lows, but the action the market took to get there. Did it gap to get there or did it progress steadily in a normal swing? With the exception of around November 22, 2007, the index has exhibited a relatively clean swing nature.

    According to that, I considered November 26th until December 20th to be an ‘upswing’ in the market which terminated far shy of the most recent daily swing high around October 8th. Correct, this was a technical lower high.

    However, the most recent five days of price action are currently constituting another upswing, and the price low that began this current upswing occurred around $75, which would be a very slightly higher low than that of November 26th at $74.70 or so.

    I’m with you – I think we have a long way to go before a new uptrend is confirmed. Each time the Federal Reserve lowers rates, it puts downward pressure on the US Dollar and I don’t see that changing any time soon. Even that may not be enough to overcome the other economic and political factors that are weighing down the US Dollar.

    I actually believe that a consolidation period or perhaps a resumption of the downtrend is more likely than an uptrend change.

    The major point of this post was sort of a hidden intention to convey to readers that you can’t just look at one speck of evidence on one time frame and get over-excited on that timeframe alone. I then show how the weekly timeframe effectively negates the glimmer of perceived bullishness (hope) on the daily charts, and note that price has more obstacles to overcome from the weight of the higher weekly chart.

    Thank you for your comment and for reading.

  3. Anna Coulling Says:

    Any dollar gains this week have been in thin markets because of Chinese New Year and above average gains against the british pound. The real litmus test is the euro/dollar which needs to fall to 1.42 to confirm the dollar’s comeback.