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Dollar Bottom?

08/08/08 09:07:42 AM
by Mike Carr, CMT

While analysts have been calling for a bottom in the US dollar for some time, this time might be different.

Security:   UUP
Position:   Buy

Global economies are linked together and a slowdown in one region will affect others. China's stock market is down about 50% year to date amid reports of economic slowing and inflationary pressures. Europe is seeing the same troubling signs and English monetary authorities are saying that a slowdown, and probably a recession, is inevitable. With weakening fundamentals in riskier nations, it seems likely the US dollar will return to its traditional role as a safe haven and this provides fundamental support for a higher dollar.

The long-term chart of the US Dollar Index (Figure 1) shows the magnitude of the price decline. All momentum oscillators are severely oversold as we would expect in a bear market. In oversold or overbought markets, Bollinger bands offer a useful analytical technique. In this case, Bollinger PercentB is showing a bullish divergence. PercentB measures where price is relative to the Bollinger bands. A bullish divergence indicates that prices have moved higher on a relative basis and these divergences often precede price advances.

FIGURE 1: $DX, MONTHLY. The monthly chart of the US Dollar Index shows a deeply oversold condition after an extended bear market.
Graphic provided by: Trade Navigator.
The daily chart (Figure 2) also offers bullish support. Prices have risen sharply since the July test of earlier lows. Prices have broken through 74, an area of past resistance. The stochastics is overbought and this is common in strongly trending markets. With prices just above the upper Bollinger band, a consolidation can be expected, which offers an opportunity to build positions.

FIGURE 2: $DX, DAILY. The daily chart of the US Dollar Index shows signs that a bottom is in place.
Graphic provided by: Trade Navigator.
Buying the dollar at current levels offers a low-risk entry point. The 20-day moving average offers a nearby stop loss for futures traders. Stock investors can use the PowerShares DB US Dollar Index Bullish (UUP) exchange traded fund, again using the 20-day moving average as a stop.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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Comments or Questions? Article Usefulness
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Date: 08/08/08Rank: 5Comment: Hello Mike, Great call. Saw it myself but slightly differently. Looking at the EUR the is a classic double top (one for the album) and it broke its pattern of rising bottoms for the first time since the low in 2005. Th problem is, this pattern only counst to the first support at 1.49. Maybe its just an interruption. Best regards
Date: 08/12/08Rank: 5Comment: 

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