Tuesday, October 25, 2016

US Dollar Reigns(ed) Supreme

The US Dollar Index (DXY) achieved a new 8 month high on Friday, October 21st and power ahead until this morning as economic data and Federal Reserve official’s rhetoric continues to provide enough support for December FOMC rate hike.  Fourteen new session highs have accompanied the last 19 sessions as the US Dollar Index has improved 4% over that period.  The US Dollar Index is clearly stretched.   


We have been bullish the US Dollar Index and became more vocal in mid-September (see; Dollar Index Still Looks Bullish).  While our longer term view remains somewhat constructive, current developments make it increasingly difficult to rely on the bullish trend to deliver.  Conveniently, a bullish trend line is drawn in the enclosed chart that collects a number of important chart points and would show a changed momentum should DXY settle below.  This trend line intersects trade today at 98.69 and advances at a rate of roughly .20 per day.

Currently DXY trades to 98.65 and would be below that aforementioned bullish trend channel support.  A settle or end of day below 98.69 would be a show of momentum change because since late September DXY has settled above this trend line.  Today’s price action has developed a bearish ‘shooting star’ pattern, something often seen at the high of bullish advances before they reverse.  Consider also that the price action over two session period ending today (considering settlement here or near) is a ‘bearish engulfing’ and too would portend lower levels.   

Finally, we would caution that neither the ‘bearish shooting star’ nor the ‘bearish engulfing’ patterns have been confirmed and it would be an aggressive positioning strategy to short the US Dollar Index here based on those signals.  However, this is certainly a good spot to take profits on long positions gained in bullish strategies dating from my last note highlighted above.