Weekly Dollar Index Chart

Over the past few days we have built a picture of the dollar index that looked like a longer-term buy signal could come during the first quarter of 2010. But what about the healthy rally of late? How does that fit into the picture? Today’s analysis looks at the weekly chart of the US Dollar Index.

An unrelenting downtrend has been unfolding since the March 2009 rally high in the dollar. Note that this is when the equity markets bottomed and started an unrelenting rally. After breaking TDST support in May, which confirmed the primary trend on this time frame is bearish, we had a perfected TD Buy setup complete in late October. The risk level associated with this trade is at 73.97 and is shown on the chart as a horizontal dashed cyan line.

A four period time window should be allowed for a setup to play out. In this instance a bullish divergence between the RSI and Composite index appeared after the market reversed at the end of November, right at the end of the four bar period.

As an aside …. The above may be the key difference in the current daily chart of gold. We have a bullish RSI/Composite divergence but never formed a buy setup. We’ll have to see if that leads to a failed trade. Now back to the dollar.

How far should one expect the dollar to go on this move? Initial targets can always be found below current TDST resistance (which is at 78.94). Currently the medium moving average is at 78.09 and the TD Trend Factor target at 78.36. We need to monitor the daily chart action as we approach these targets.

Bottom line: The weekly chart indicates that, at a minimum, a significant counter-trend rally got underway in late November. Over the weekend I will look at the daily chart to see what kind of staying power this rally might have.

Technical Analysis of for longer-term positions:

Dollar Index: Out. (0.65 point loss after 1 trade). We were able to break through TDST resistance yesterday, as well as the TD Sell Setup risk level. Both events painfully reminding us that we got out of our long too soon. What caused this mistake will be explained in the next post.
World Gold Index: Long from 1139.20 on 12/16/09. Will 1101.20 hold as support? If not I am out on a close below that level.
Cash SP500: Out on a close below 1085.89.
10 yr Bond: Neutral, waiting for a signal.
CRB Index: Neutral. Has been consolidating since 10/21/09.