Positive Divergence on US Dollar Index

Dec 4, 2007: 12:07 PM CST

There is temporary reason to be optimistic on the US Dollar Index with its recent momentum divergence, which has already achieved its index price target.

Momentum divergences are – by their very nature – countertrend trades and often are applicable only for a small target, such as a return (snap-back or reversion) to the 20 period moving average.

Momentum divergences can create high probability short-term trades as they highlight the lack of conviction, or strength, of the prevailing force on the most recent price swing.

Notice the recent swing divergence on the US Dollar Index, which would have set up a quick trade (in the futures market) for a retracement to the declining 20 period moving average.

Divergences do NOT overrule the current market/price structure, which is in the most bearish trend orientation (notice the ‘total bear’ orientation of the key moving averages):

Nevertheless, the divergence (with price making a lower low and the momentum oscillator making a higher low) forecast and achieved its profit target effortlessly and rapidly (thanks, in part, to short-covering to those who over-positioned themselves).

Lessons to take away from this chart:
  • This is a “Textbook example” of a clear downtrend
  • Momentum divergences are high-probability trades with a small target (window)
  • Even the strongest downtrends need a ‘pause’ or reprieve
2 Comments

2 Responses to “Positive Divergence on US Dollar Index”

  1. TheFinancialNinja Says:

    Good call on the US dollar bounce.
    Crude looks like a potential double top and Gold looks a little toppy too, with a lower high after $850 held. Could there be a bigger US dollar bounce in the cards? I’ve put up some charts today on the subject: (http://benbittrolff.blogspot.com/2007/12/uk-definately-next-important-victim.html)

    TheFinancialNinja

  2. Corey Rosenbloom Says:

    Thanks for the comment!

    I agree that the ‘inter-market forces’ or relationships are forming similar patterns, and that we should be sensitive to those signals. It would be a year-end reversal if what looks like is going to happen should happen, but we must go on the charts and their relationships.

    Whether or not you take on a large ‘reversal style’ strategy here, it’s probably best to exit any speculative positions and see if the true reversal occurs as it might. It would certainly catch a lot of investors off guard.