Technically Speaking

U.S. Dollar Index: Not Done Going Down

Source: DTN ProphetX

The strong rally in the U.S. dollar index (USDX) the last couple of weeks has brought about the expected inquiries of whether or not I still think it's in a downtrend. The short answer is yes, but that doesn't give you much insight as to why.

The slightly longer answer is, technically the USDX never finished its downtrend. That alone leaves it open to renewed selling in the weeks ahead. Take a quick look at the attached weekly chart. Notice that weekly stochastics (bottom study) did not post a bullish crossover (faster moving blue line crossing above the slower moving red line) below the oversold level of 20%. Yes, a bullish crossover did but with both lines above the oversold level (40.3% and 35.4% respectively) it only indicates a pause, or retracement phase, in the secondary (intermediate-term) downtrend.

If you shift your gaze up to the weekly bar chart for the USDX, you'll see that is exactly what has happened. After testing support at 92.236, the 33% retracement level of the previous uptrend from 78.906 through the high of 100.390, the last two weeks have seen the USDX quickly move to a test of resistance at 97.973. This is the 67% retracement level of the initial sell-off from the 100.390 high through the 93.133 low.

A normal trend pattern could see the USDX work higher again next week, making it three weeks against the prevailing trend, before starting to move lower again. Ultimately it should work back to at least a test of its previous low, setting the stage for a potential double-bottom formation. This sell-off would also likely take weekly stochastics below the 20% level, setting the stage for a more meaningful bullish crossover indicating a change in the secondary trend.

If selling gains momentum and pushes the USDX below the 33% level, it is hard to imagine a secondary move below the 50% retracement level of 89.648. Such a move would also be in line with the potential of the major (long-term) downtrend, with support between 90.503 and 89.048. These mark the 33% and 38.2% retracement levels of the previous major uptrend from 70.698 (March 2008 low) through the 100.390 high (March 2015).

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