The direction of the US Dollar Index (DXY) is key to the direction of many markets from the leveraged commodity scene to the emerging markets. Recently, the dollar has been softening as risk-off impulses continue to ebb.
Some market observers are looking ahead to an eventful January, where they believe the underlying trend for a stronger dollar remains intact. We on the other hand want to focus on the charts and indicators.
Let's check.
In this daily bar chart of the US Dollar Index, below, we can see that prices have narrowed into a tight trading range. The daily Bollinger Bands have narrowed and that often precedes the start of a new trend. The Moving Average Convergence Divergence (MACD) oscillator crossed to the downside in late November for a take profits sell signal.
In this weekly Japanese candlestick chart of DXY, below, we can see some upper shadows on approach towards $97, telling us that traders are showing us some rejection of that area. The 12-week price momentum study shows roughly equal highs from August to December when prices made higher highs. This is a category of bearish divergences and can foreshadow a price reversal. The slow stochastic indicator, a measure of overbought or oversold, is turning down from an extreme overbought reading.
In this daily Point and Figure chart of the Invesco DB US Dollar Index Fund (UUP), below, a bullish dollar ETF, we can see a nearby price target of just $26.92. Weakness below $25.70 could be the start of a decline.
In this weekly Point and Figure chart of the UUP, below, we can see a price target of only $26.17.
Bottom line strategy: The US Dollar rally looks tired and about to turn lower. While the year-end could see a drying up of liquidity and some "false moves", the DXY looks poised to turn lower in early January.
