Technically Speaking

US Dollar Index: Puttin' on Its Top Hat

Source: DTN ProphetX

One of the things I talked about in my annual market outlook presented at the recently concluded DTN/The Progressive Farmer Ag Summit was the fate of the U.S. dollar index (USDX). With little to no fundamental basis, I asserted, the index looked like it could be nearing a major (long-term) move to a downtrend. This was based solely on technical signals being established on its monthly chart. Often, changes have to occur on shorter-term charts (weekly, daily) that create ripple effects seen later in monthly patterns. This past week may be those first steps in the USDX.

As its weekly chart shows, activity the last two weeks (red circled area) could prove pivotal in the direction of the U.S. dollar index. Two weeks ago the USDX posted a new high of 89.467, closing near its high at 89.334. Then this past week saw the USDX post another new high of 89.550 before falling to a low of 87.913 and closing at 88.321. Those familiar with this blog will immediately ask, "Did it establish a key bearish reversal?" knowing that is one of the important turn signals I look for. The answer is no. Last week's low did not take out the previous week's 87.783, but there is another reason to take a close look at these last two weeks.

In his book "Technical Analysis of the Futures Markets" author John J. Murphy describes a number of different reversal patterns, beyond the key reversal I mentioned earlier. Another is the two-day reversal, or in this case, the two-week reversal given my preference for weekly charts over daily charts (from page 97, "Weekly reversals are much more significant than daily reversals for obvious reasons and are watched closely by chartists as signaling important turning points.")

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

A classic two-week bearish reversal has these characteristics: 1) A market sets a new high (Check!) 2) The market closes that week near the new high (Check!) 3) The next week the market opens near unchanged (Check!) before closing near the previous week's low (Check?).

The debate between USDX bulls and bears will be whether or not the weekly settlement of 88.321 is near enough to the previous week's low of 87.783 to be considered "near". Murphy answers this question, again on page 97, "The secret is being able to determine when a reversal day (my comment: week, or pattern) is important and when it's not. This judgment can only be made, however, when all other technical evidence has been reviewed."

Murphy is absolutely correct. We often will see a pattern that goes unconfirmed by other technical indicators, raising doubts as to its strength or accuracy. So what other evidence do we have that the USDX may have established a two-week top?

Take a look at weekly stochastics (bottom study), a momentum indicator I use to look for changes in market attitude. Note that this past week saw stochastics finish with the faster moving blue line at 87.98% while the slower moving red line was at 91.93%. To me, this creates a bearish crossover since both are above the overbought level of 80%. Also note that this past week's crossover is a secondary, or confirming, signal to the higher bearish crossover (blue line 93.14%, red line 95.4%) posted the week of October 6. This strengthens the argument that the USDX has established a secondary (intermediate-term) top.

But there will undoubtedly be some market watchers out there wanting more conclusive evidence, again due to the question of is near near enough. For them the key might be a move to a new four-week low, another important reversal signal. To do so next week the USDX would need to slide below 87.182 (dashed red line), the low from the week of November 17.

My opinion is that the USDX has established a secondary top, with the move to a new four-week low a formality. Initial support is pegged at 86.006, the 33% retracement level of the previous uptrend from 78.906 through this past week's high of 89.550. However, an extended sell-off back to the 50% retracement level of 84.228 is likely. And if that occurs in December, the monthly chart I talked about at Ag Summit gets a whole lot more interesting. The USDX would then have established a major (long-term) key bearish reversal (taking out both ends of the November price range before closing lower for the month) and probably a bearish crossover by monthly stochastics above 80%.

Stay tuned.

To track my thoughts on the markets throughout the day, follow me on Twitter:www.twitter.com\Darin Newsom

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .