By Jeff Clark, editor, Market Minute I was wrong. Three months ago I told readers the rally in the US dollar was just about over. The buck was overbought. Technical conditions were stretched quite far to the upside. It seemed to me there wasn’t a lot of fuel left to propel the dollar much higher. So, for folks who had bet on a dollar rally in September based on the bullish setup I wrote about back then, I suggested taking profits on that trade. Since then, the US dollar index has rallied 5%. It closed recently at its highest level in 2.5 years. The “buy-the-buck” trade would have been even more profitable. We left some money on the table. But, at least I didn’t recommend shorting the dollar – which would be a losing position right now. I was tempted – to be sure. The buck was overbought. Conditions were stretched. And, I didn’t think there was much upside left. But, the dollar’s setup in October lacked one of the key conditions I look for before making a short trade… Negative Divergence Is Key It lacked negative divergence. The various momentum indicators I follow were moving higher right along with the dollar, which confirmed the rally. And, while any further upside seemed limited to me, the lack of negative divergence suggested the dollar wasn’t ready to reverse right away. Today, though, we have a different story. Look at this updated chart of the dollar index… (Click here to expand image) As the dollar index has been making higher-highs over the past two months, the momentum indicators at the bottom of the chart have been making lower-highs. This sort of “negative divergence” is often an early warning sign of a reversal to the downside. The dollar is overbought – just as it was in October. The moving averages are extended far away from each other – also just like October. This time, though, we now have negative divergence in place as well. Free Trading Resources Have you checked out Jeff's free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
It sure looks to me like the dollar index is forming at least a short-term top. So, while I didn’t recommend shorting the buck in October, the current setup looks like that could be a good trade for aggressive traders. Best regards and good trading, Jeff Clark
Editor, Market Minute | 