The Return Of How The Dollar Gets Its Groove Back

09/24/04 09:42:59 AM

by David Penn

Will a positive stochastic divergence in September result in a rally in U.S. dollar futures?

Security: DXZ4
Position: N/A

Having written frequently about a bearish outlook for precious metals ("Gold's Last Gasp? Parts I and II," Working-Money.com and "So Long, Silver," Traders.com Advantage) it should be little surprise to see a bullish argument for the dollar on display here.

But because a rally in the dollar, a rally that could see greenback futures taking on (or "taking out") their May 2004 highs, would come as a complete surprise to virtually the entire investing public, it seems worthwhile to highlight those signals that point to a possibly higher dollar when they arrive.

If a positive stochastic divergence develops over the course of September, then greenback bulls (who?!) may have the intermediate-term bottom they've been waiting for.

Graphic provided by: Prophet Financial Systems, Inc.

The dominant intermediate-term technical development in greenback futures (December 's shown here) is the triangle consolidation in August and September that occurred at the end of the dollar's correction from its May highs. But the dominant short-term technical development may be the positive divergence that is developing between the consecutively lower price troughs in the greenback in September and the consecutively higher price troughs in the 7,10 stochastic. While the 7,10 stochastic has yet to hook upwards, thus confirming that a higher, second trough has been completed, the inability (so far) of the December greenback to set a new low in September vis-a-vis August contributes toward making a rally anticipated by a positive stochastic divergence increasingly possible.

What should be anticipated here is straightforward. While advancing prices are more or less a no-brainer, all the positive stochastic divergence requires at this point is that the currently declining stochastic not make a new low versus the previous stochastic trough. Even if the current lows of September are penetrated to the downside, a higher stochastic trough will likely mean that greenback bulls are just that much closer to a surprisingly bullish dollar.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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The Return Of How The Dollar Gets Its Groove Back

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