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Currency Market: US Dollar Index Could Be Rolling Over, Might Test 200-DMA

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The euro continues to hold up, and this probably means some more downside for the US dollar.

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The US Dollar Index has failed to hold the 79 support level and now looks like it could be rolling over. This market is getting tricky here, so we need to pay close attention and see how it reacts to some of these near-term levels.

While the longer-term trend still looks like it has turned up, shorter-term momentum is negative, and it looks like we could have a small head and shoulders top forming. Consecutive closes below the 78.5 neckline would imply a possible downside target of 75, which would be a major break of the 200-day moving average and coincide with the late October 2011 US Dollar Index low.

At the same time, the DX seems to be holding the live angle support line, and this recent push lower looks like it could form a positive divergence. I am going to sit on the sidelines for now and let the market tell me which way the US Dollar Index is going. You can see the mixed signals on the chart below.


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The Japanese yen has continued to trend lower, and I still think you can sell any rallies. While this strong trend might be a little extended short term, this looks to me like it could be a major long-term trend change, with serious implications for the Japanese economy, which has struggled with a strong currency.

As you can see in the below weekly chart, the yen has basically trended up perfectly since 2007, and this recent down move looks like it is breaking a very long-term trend line. The risk-reward on the short side makes a lot of sense to me here!


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My call on the EURGBP cross was clearly wrong last week, as the cross broke above the 0.84 resistance level I cited literally the day after I pointed it out. Nice timing, Cody! This reminds us to always manage risk and learn from our mistakes when we are wrong.

As you can see in the below chart, once the 0.84 level cleared, the cross ripped straight up to 0.85. Back to the sidelines on this one, but this is a great example of why we use stops! Good luck out there and stay nimble…these markets sure have been tricky!


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Positions in EUO, Japanese yen futures
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