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STRATEGIES


Dollar Heading Higher?

12/17/09 10:16:07 AM
by Mike Carr, CMT

Momentum has shifted in the dollar and points to the next big move being up.

Security:   DX
Position:   N/A

The dollar is prone to volatility. It also trends nicely and although this may sound contradictory, it really means that maximum risk is associated with the greatest possible returns. Spotting trend changes can be difficult but obviously rewarding.

Momentum is a commonly employed technical tool. It is commonly believed that changes in momentum precede changes in price. We can see in Figure 1 that momentum in the dollar index has turned higher. The relative strength index (RSI) has broken above its long-term moving average (34 periods is used in the moving average simply because it is long term and is a Fibonacci number). The 52-week rate of change has turned higher.


FIGURE 1: DX-067, WEEKLY. The weekly chart of the US Dollar Index is showing a breakout to the upside in RSI and ROC indicators.
Graphic provided by: Trade Navigator.
 
These bullish developments come with two tradable insights. First, we may see the dollar stall when the rate of change approaches its 26-week moving average. This line has served as both resistance and support in the past and is worth watching.

The solid line shown with the bar chart of the dollar is the Standard & Poor's 500. The dollar and this stock market index have been moving in opposite directions for some time. That is our second insight that it might be time for stocks to slow, or reverse, their advance.



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."

Website: www.moneynews.com/blogs/MichaelCarr/id-73
E-mail address: marketstrategist@gmail.com

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