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Debunking the Dollar's Demise


Using technical analysis on today's headlines.

The headlines are screaming that the US dollar's demise is imminent. I wonder if technical analysis supports that contention.

If it were true, when I pulled up a daily chart of the US dollar I'd see extreme weakness in the US dollar and most technical indicators would confirm that weakness.

The trend is definitely down, but I need to look under the hood. I will first look at momentum, the velocity of price in a trend. Momentum can be seen with most oscillators and momentum indicators.

Early in a trend, velocity is strong and most new highs in price are confirmed by equally strong movements in an oscillator. As the price trend continues, however, momentum will usually peak ahead of price and show up as divergence in the oscillator. Divergence is when momentum lags price, or even starts to trend in the opposite direction. When price is making a new high and the oscillator is making new lows, it's called negative divergence. When price is making new lows and the oscillator is making new highs it is called positive divergence.

A change in momentum that shows up as divergence in the oscillator when the oscillator is in or near its oversold or overbought region is usually a leading indicator that price will undergo a change in direction. The change in direction could be a sideways pause, a small correction, or a more significant turn in the opposite direction. Other factors and indicators need to be considered when assessing the likely outcome of a divergence, but at the very minimum, it's a sign that the velocity of current price direction has weakened significantly and is probably about to change.

On the daily chart of the US dollar I see positive divergence on most oscillators. Momentum is trending in the opposite direction of price.
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Click to enlarge

Big deal, I have a short-term warning of weakness in the down trend. By itself it means little to nothing. It could be a turn or it could just be the normal ebb and flow of the down trend. I'll look to see if there are any other technical indicators to aid me in determining what type of change in price for the US dollar I should expect. I'll look at the longer-term picture for more clues.

In the monthly chart, I see a couple of indications that the change in price might be more than a pause in the downtrend. Since the dollar put in its low in April 2008, volume has increased dramatically. Increased volume at market lows and highs is usually a very good indicator of a turn. More recently, the largest volume spike in the history of the US dollar occurred last month, with the dollar finding its footing and completing a candlestick Doji pattern for the month. A candlestick Doji is a major reversal pattern.

Wow! By looking at only a few charts I now have determined that not only are the headlines probably wrong, but quite possibly 180 degrees wrong. On a daily chart of the US dollar, I have positive divergence in most oscillators contrasted against the downward direction of price. On the monthly chart, I have a huge increase in volume since the low was put in, including the largest volume spike in recent history just last month, accompanied by a major candlestick chart reversal pattern.

Click to enlarge

I wonder what else technical analysis can tell us about the headlines.
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No positions in stocks mentioned.

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