Over the past few months, the focus has increasingly been on the action in the dollar as its weakness has corresponded to strength in stocks and commodities. As several analysts have pointed out, the bearish sentiment has reached extremes over the past few weeks, and recently, only about 5% of the analysts were bullish. The dollar has also been the focus of the financial press, which generally makes me nervous. Forex traders know that the technical view of the dollar index is often much different than that of the other currency pairs, and so an in-depth look at all of these markets seems timely.

Figure 1 - Click to Enlarge

The dollar index completed a top the week of March 13, point 1, as the RSI  gave a clear reversal signal. The OBV dropped below its WMA the next month (point 2) and then violated more important support, line d, in mid-May (point 3). The OBV is currently well below its declining WMA. Despite a couple of two- to three-week rallies, the decline has been quite steady with no sharp weekly drops. The dollar is now approaching the next band of support in the 71.50-74 area. The next Fibonacci projections are at 66.50, which is the 127.2% downside projection of the 2008-2009 rally. This also corresponds to the long-term support on the weekly chart, line c. Given the high degree of bearish sentiment and the fact that the gap between the OBV and its WMA is so wide, a rebound is likely before year end. I would expect any rallies to be similar to what occurred in early and late 2007, which I have noted on the charts by circles a and b.

Figure 2 - Click to Enlarge

The Australian dollar is one of the few currencies that is approaching its 2008 highs as it has skyrocketed from the March lows in the .6200-.6300 area (point a) to over .9200. The OBV on the aussie dollar futures moved above its WMA and downtrend, line e, at the end of March. The move above the late-2008 highs confirmed that a bottom was complete, as noted on this May 7 chart. The OBV was already back to its 2008 levels as we approached the major 61.8% resistance in June (point b). After a shallow, five-week correction, the uptrend resumed with the OBV staging a major upside breakout, point 1. If the current rally from the low at point c equals the rally from point a to b, then it would take the aussie back to the .9650-97 area and the upper boundaries of the trading channel. The 2008 high in the cash was .9849.

NEXT: Review Continues with British Pound and USD/CAD