Dollar Dives

Fri, Oct 8, 2010 - 8:35am

As of 7/14/2010 the U.S. Dollar Index switched from a Trend Model BUY signal to NEUTRAL. This is one of those cases where the Trend Model 20/50-EMA crossover occurred while the 50-EMA was still above the 200-EMA, therefore, a NEUTRAL signal results instead of a sell. Although the model did not allow us to exploit the decline, we were able to sidestep it, which is satisfying in itself. A discretionary short-term shorting opportunity did occur when the PMO topped below the zero line and crossed down through its EMA in September, but our medium-term posture will stick with the discipline of the mechanical model.

On the daily chart above that the price index has nearly reached the bottom of a proposed declining trend channel. I say "proposed" because a second price bottom has not yet confirmed it. A declining trend is defined by a line drawn across declining tops, and we can estmate the bottom by drawing a line parallel to the declining tops line across the bottom between the two tops. That line is where we will start looking for support.

The problem is that the decline has been extremely sharp, as can be better seen on the weekly chart below. We can see that long-term support is presented by a rising bottoms line, and it will come into play at around 76, approximately where the daily chart channel support will engage.

Bottom Line: Although the Dollar Index will encounter strong support at around 76, the decline from the June top has been quite accelerated, and for now I think the best we can expect is a bounce off the support before the decline resumes.

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Technical analysis is a windsock, not a crystal ball.

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