The dangerous Dollar divergence dilemma

• Posted by Greg Harmon
• on June 16th, 2015

My kids loved the A to Z Mysteries. The only problem with them is that they are inherently limited in their success as there are only 26 letters in the alphabet. But if Ron Roy should decide to do another set of 26 letter mysteries I have a suggestion for the letter D, The dangerous Dollar divergence dilemma .

The US Dollar woke up almost a year ago and started a strong move higher. But after a 25% run higher to a peak in early March, it has weakened materially. This is leading to increased debate over whether the run higher has ended. Or if it is in a consolidation period now. Or finally if the pullback has just begun a new trend lower. And a look at the chart does not do much to settle the debate. The chart above shows the price action in the US Dollar Index since the start higher last year.

There are many signals that point to the Index continuing higher. The Andrews’ Pitchfork is a good tool to look at the trend and it shows the price holding on the Lower Median Line, riding higher. The RSI, a measure of momentum, is also holding over the mid line in the bullish zone. The higher low is a positive sign as well. So as the Index has pulled back these indicators remain bullish, supporting a continuation higher. And should it hold and reverse, a less than 38.2% pullback of the move higher is a good show of strength.

But the other momentum indicator, the MACD, crossed down in mid April giving a bearish signal and has been falling ever since. That Andrews’ Pitchfork is also very tight to the Hagopian Trigger Line. A movement in the Index under the Trigger Line is a sell or short signal. The lower high also warns of a possible downtrend.

Then there are some signals in the neutral camp. Start with the Bollinger Bands®. They have moved from a rising channel to a flat channel. The 20 week SMA has also turned from rising to flat. So how do you solve this mystery?

The rule of thumb is to stick with the prevailing trend until there is evidence that declares overwhelmingly a trend change. This has not happened yet, so the path of the trend is still called higher. A break of that Hagopian Trigger Line along with a move in price under the 38.2% retracement with the RSI moving under 40 would change that to a trend lower.

Apologies to Ron Roy for ripping up his classic series.

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