Dollar Index Is Poised for an Upside Reversal

 | Aug 08, 2017 | 2:39 PM EDT
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When I look at the charts and few indicators of the U.S. Dollar Index I come away with the belief that it is poised for an upside reversal. A weak dollar this year has probably been one more background element that contributed to the stock market's rally, but that supportive input may have run its course. Let's examine a few charts.

Looking at a daily chart of the Dollar Index (DXY), below, we can see that the index peaked in December and has been declining this  year. Prices are below the declining 50-day and the declining 200-day moving average lines. In the lower panel is the slow stochastic indicator. This misnamed technical tool is a measure of how overbought or oversold a market is  -- the DXY got very oversold in July.

Looking at a weekly chart is our part of our methodology of analyzing stocks. In this weekly chart of DXY, below, we can see that on this longer timeframe that the DXY is oversold.

Momentum is a leading indicator and it can be seen in this last chart of the DXY, below. Using a 20-day momentum study (a month of trading) we can see the while the DXY has been making lower lows the momentum study has made equal lows. This is a bullish divergence and could be foreshadowing a DXY rally in the coming days and weeks.

Bottom line: I anticipate a rally to retrace a third or more of the decline in the DXY since January.

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