Will the Dollar Lows Hold?

12/10/2009 12:01 am EST

Focus: FOREX

Thomas Aspray

, Professional Trader & Analyst

The action of the US dollar index and the dollar against most of the major currencies over the past few days has caught the market’s attention. For the first time since March 13, when the weekly divergences in the dollar index indicated a top, my daily technical studies have turned positive, consistent with at least a short-term dollar low. But is a more important low in place?

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Though the weekly and monthly analysis is always the most important part of my analysis, I wanted to start off with a look at the daily chart of the dollar index because it is so widely watched, but not traded by most. The dollar index topped on March 3 at 89.71 and hit a low in the past two weeks of 74.27. On these lows, the selling (for a change) was not as heavy as before with the on-balance volume (OBV) acting much stronger and forming a bullish divergence, line e. The initial OBV resistance, line d, was overcome and further new highs would be quite positive. A move in the OBV above the longer-term resistance at line c would be even more impressive. The daily downtrend at 76.70 should be tested this week, and a test of the 23.6% resistance at 78 is likely over the next week or so. Normally, I would expect the rally to stall in this area, but with the massive short dollar position, this may not happen. The first major upside target is the 38.2% retracement resistance in the 80 area.

Figure 2
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The weekly chart of the EUR/USD shows that the euro peaked in the 1.5140 area over the past two weeks, falling short of the major 78.6% resistance level at 1.5260. The euro (through December 8) is testing the weekly uptrend, line a, and chart support in the 1.4630 area. There is additional support in the 1.4500 area. The weekly RSI formed a short-term negative divergence at the recent highs, point 2, and is likely to break its uptrend, line b, this week. At a major top, we would normally expect to see a divergence that was formed over a longer time period, but if one assumes that this whole rally was just a rebound of the 2008 decline, then it could end with such a short-term divergence. Typically, we would expect to see another one to three weeks on the downside and then a rally that would take the RSI back to its declining WMA. This should be the optimum selling opportunity.

Figure 3
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The daily analysis of the euro futures nicely supports the weekly analysis as the euro futures made marginal new highs last week, point 2, but the OBV was much weaker. This indicates that there were significantly fewer buyers than there were on the prior highs (point 1). The break of the uptrend in the OBV, line c, confirms the negative divergence as well as the break of the uptrend in prices, line b. I would not be surprised to see a stronger rebound in the euro if the support in the 1.4200-4400 area is tested. First resistance is now in the 1.4750-1.4850 area.

Figure 4
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The bounce in the British pound from the October lows was weaker than I expected, as I was looking for a move above the August highs before the rebound from the early 2009 lows was completed. Though this is still possible, it looks less likely now as both the weekly and daily technical studies have deteriorated. The uptrend in the RSI from the lows, line c, was broken in September, which was an early warning sign. The RSI now shows a pattern of lower highs, line b, and though still locked between 50 and 70, it is below its WMA. A break of the new uptrend, line d, should signal an increase in selling and take the pound to the 38% support at 1.5700, if not the 50% support at 1.5280. There is resistance for the pound in the 1.6450-1.6600 area.

By Tom Aspray, Trading Lessons editor, MoneyShow.com

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