Picking the Dollar’s Bottom Can Be Dirty Business
- Posted by Greg Harmon
- on June 24th, 2011
The US Dollar Index has been bouncing in a range for the last 3 months. This has many getting aggressive in calling a bottom that coincides with the end of Quantitative Easing. But despite the childish humor, picking a bottom can be dirty business. Let’s take a look at the US Dollar Index and see if this is a clean call or likely to be a bit messy.
Looking at the daily chart of the PowerShares DB US Dollar Index Bullish Fund (ticker: $UUP) below there are several signs that a broad bottoming process may be taking place. The Bollinger bands
have moved from a downward trend to a sideways consolidation. There also appears to be a ‘W’ pattern forming, highlighted in green. For the ‘W’ to play out it needs to get over 21.90. But notice that so far the highs have been lower and the lows have been higher. The other indicators are a bit mixed also signaling some consolidation or indecision. The Relative Strength Index (RSI) is also making lower highs and higher lows while the Moving Average Convergence Divergence (MACD) indicator is doing the same. What about a longer timeframe to get some perspective.
Using the US Dollar Index (ticker: $DX_F) weekly chart above is not quite as promising. It shows that the downtrend is from a double top over 88 from early 2010. It also shows two imbedded Head and Shoulders top patterns with downside targets of of 71.75 and 59.80. The move off of the congestion area from 72-73 in May could be interpreted as heading higher to retest the neckline of the Head and Shoulders pattern. It has some momentum behind it with the rising RSI and the increasing MACD, but it would be difficult to call the downtrend dead until it gets over the neckline just over 77. All of the SMA”s are sloping lower! On a monthly basis the US Dollar Index is also not
out of the woods. The chart shows that the Index broke down out of a symmetrical triangle after a long fall, leading to an expectation of a continuation lower. It often happens that these breakdowns are retested before a major move is made, and it looks like that retest is about to happen. This is the same level as the weekly chart, just over 77. A rejection at the rail certainly means that the bottom is not it for the US Dollar Index. But a move through the rail also does not mean a bottom has been found long term. Until it gets through the top rail at 87.50 and then the previous high at 88.51 there is no sense in talking about or picking any bottom. If you do, keep the wipes handy, it can still explode lower. Hey, its Friday.
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Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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