A Dollar Divergence

11/30/07 10:03:02 AM

by Arthur Hill

Is the US Dollar Index poised for a bounce? The RSI formed its second positive divergence in four months and is on the verge of a momentum breakout.

Security: $DXY
Position: Accumulate

The US Dollar Index ($USD) remains in a long-term downtrend but is clearly oversold and ripe for at least an oversold bounce. I wrote about a bullish engulfing pattern on October 22, but this pattern was never confirmed and the downtrend continued. On the weekly chart (Figure 1), the 10-period relative strength index (RSI) dipped below 30 in May 2006, December 2006, April 2007, and July 2007. The indicator moved below 30 again in mid-September and has been oversold for more than two months.

FIGURE 1: $DXY, WEEKLY. The 10-period RSI dipped below 30 in May and December 2006, and April and July 2007.

Graphic provided by: MetaStock.

The big trend is clearly down for both the RSI and the US Dollar Index. The RSI peaked above 70 in November 2005 and formed a series of lower highs the last two years. A break above 50 would reverse the downtrend in the RSI. The index itself peaked in November 2005 and declined the last two years. The decline accelerated the last three months and trendline resistance is around 80.

Despite a long-term downtrend, there can be countertrend rallies to alleviate oversold conditions. On the daily chart (Figure 2), the RSI formed its second positive divergence in the last three months. The RSI failed to break above 50 on the first positive divergence. The indicator is making another breakout attempt at 50 and such a move would confirm this divergence.

FIGURE 2: $DXY, DAILY. The RSI formed its second positive divergence in the last three months.

Graphic provided by: MetaStock.

On the price chart, I am marking key resistance at 76.15. A move above this level would break the August trendline and the mid-November high. This would reverse the four-month downtrend and call for an oversold bounce. The upside target would be around 78–79. This stems from the October highs and a 50% retracement of the August–November decline.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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RSI

A Dollar Divergence

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