Will the Dollar Lows Hold?

12/17/2009 12:30 pm EST


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?

Figure 1 - Click to Enlarge

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 (thru December 8) 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 - Click to Enlarge

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 - Click to Enlarge

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.

NEXT: Analysis of EUR/USD, GBP/USD, and More


Figure 4 - Click to Enlarge

The hourly chart (updated through December 15) shows the early-December highs, point a, that were not confirmed by the OBV on the futures. The hourly downtrend is well established and shows a series of continuation patterns and a series of lower highs and lower lows. The next Fibonacci retracement support of the rally from 1.3750 to 1.5139 is at 1.4450, which may be tested before this article is released (December 17). Using the decline from a to b and projecting down from point c gives us a 100% Fibonacci target in the 1.4320 area, which also coincides with the lower parallel trading channel. Once this decline is complete, I would expect a rebound in the euro should clarify the daily and weekly outlook and is likely to present a good shorting opportunity.

Figure 5 - Click to Enlarge

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.

The Australian and Canadian dollars, often referred to as the commodity currencies, have received much attention in 2009. The strength in the yen has also been noted as many are concerned about its impact on the Japanese economy. This makes these three currencies important as well.

Figure 6 - Click to Enlarge

The Australian dollar had quite a slide in 2008, falling from a high at .9770 to a low just under .6000. It bottomed in October and then held well above the lows in early 2009. The move in the OBV above its downtrend and WMA, point 1, was a strong sign that the aussie had bottomed. (Click here for a chart.)

Even though the weekly uptrend in prices is being tested, line a, the OBV is still positive as it did confirm the most recent highs. It is still well above its uptrend, line b. This is not the case with the daily analysis as even though the Australian dollar made new highs in November, line c, the OBV formed lower highs as indicated by line e. The daily uptrend in the 90 area, line d, is now being tested, but the break of the uptrend in the OBV (line f) suggests that it will not hold. The next good support comes in the .8750 area, with the 38.2% support at .8200. With the weekly analysis positive and confirming the recent highs, a further correction should set up a buying opportunity.

Figure 7 - Click to Enlarge

Over the past six days, the aussie has been locked in a trading range between support at .9040 and resistance at .9250. The daily trend line support comes in at .8975, while the 38% support of the rally from the lows at .7706 is at .8760. If the aussie can move above the .9200 level, we should see a test of the daily resistance at .9310, and I would not be surprised to see this level also overcome given the reading from the daily and weekly technical studies. (Note: In early trading on December 16, the .8975 level was tested.)

NEXT: Timely Look at USD Versus CAD and JPY


Figure 8 - Click to Enlarge

The outlook for the Canadian dollar futures is less clear. The double bottom was completed in the .7650 area in mid-March (click here for chart). After just a bit more than a 38.2% pullback in July, the Canadian dollar turned higher, testing the .9800 area in October. There is a heavy band of resistance between .9800 and 1.0200. The OBV has been acting stronger than prices, line a, since it made a new high early in the year. Even though the Canadian dollar has been basically flat for the past few weeks, the OBV has continued to move higher. The daily analysis is giving us a fairly different picture. While the futures were making higher highs, line b, the daily OBV failed to confirm these highs (line c) This weakness is supported by the break in the OBV’s uptrend, line e, in the past few days. The daily OBV has key support now at line d, and this is therefore the key level to watch. The Canadian dollar has first support at .9330 and the 38% fan line with more important support in the .9000 area. It would take a break below .8500 to change the long- term positive view of the dollar, and this does not look likely at this time.

Figure 9 - Click to Enlarge

The dollar is also trying to bottom versus the yen, but clearly, the jury is still out as it needs to prove itself on the upside. The monthly RSI (not shown) has formed a positive divergence since early in 2009, but it has not been confirmed yet. This divergence is also evident on the weekly chart, as while the dollar has made lower lows versus the yen, line a, the RSI has formed higher lows, line d. The weekly RSI is above its WMA, but it is still declining. A move through the initial downtrend in the RSI, line c, would improve the technical outlook, but a move above the major RSI resistance at line b is needed to confirm a intermediate-term low. Initial support is now in the 85 area, and if we do see new lows over the next few weeks, they would not be confirmed by the RSI. There is key resistance now in the 91-92 area.

Figure 10 - Click to Enlarge

The dollar has rallied sharply from the support in the 87.35 yen/dollar area and held well above the 61.8% support in the 87.10 area. The rally on December 15 took the dollar back above the hourly downtrend, which is a positive sign. A daily close above the early-December highs at 90.75 should be enough to complete the dollar’s bottom versus the yen. A drop below the near-term support at 88.30 yen/dollar would reverse the positive momentum, while a break below 87 would be more negative.

Clearly from this analysis, the next few months may be pivotal for the dollar because while everyone looking for the Fed to raise rates before the dollar can bottom, the technical picture suggests that the dollar could bottom before that. We hope to provide more regular FX analysis during this pivotal period.

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