Dollar Index Looks Toppy

03/09/2010 12:01 am EST

Focus: FOREX

Thomas Aspray

, Professional Trader & Analyst

Just over a week ago, there were some signs that the dollar’s rally was losing upside momentum and that the sentiment was way too bullish on the dollar. At that time, I concentrated on the euro (click here for chart), and though it did bounce, the rally was not strong enough to close above the key short-term resistance at 1.3700. I would have been better off just looking at the dollar index since the picture is quite different depending on which cross rate you are following.

Figure 1


Click to Enlarge

As noted last year, the weekly technical studies formed significant negative divergences last March (click here for chart) and remained negative until December 10, 2009 (see this related article) when the daily studies suggested at least a short-term low was in place. Upside targets were at 78, and then in the 80 area, which corresponded to the major 38.2% retracement resistance. The rally high so far has been 81.43, with the 50% retracement resistance at 82. The recent high was very close to the target from the Fibonacci projections using the rally from points a to b and then measuring up from the low at point c, as the equality target (100%) was at 81.00.

The daily OBV did form a short-term negative divergence at the recent highs and then dropped below its WMA and the uptrend, line 1. This is consistent with a short-term top, though with the weekly studies positive and not diverging, we are looking for a correction, not the resumption of the dollar’s long-term downtrend. Sentiment is also still too bullish on the dollar and negative for the euro, which is consistent with the technical outlook. There is key short-term support now at 79.60-85, basis the March contract. As long as this support holds, we can’t rule out one more push to the upside before a more significant correction. Such a rally should be an opportunity for traders to establish short positions or at least hedge their longs. The 38.2%-50% band of Fibonacci support is in the 78.60 to 77.90 area. On a decline into this support zone, the bullish divergence uptrend in the OBV, line 2, should be tested.

In this week’s edition of Trading Lessons, we will look at more of the major currency pairs and update the key Fibonacci levels that you should be watching. Click here to subscribe free to the bi-weekly Trading Lessons e-letter.

By Tom Aspray, Trading Lessons editor, MoneyShow.com

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