The Dollar Index (DXY) continues to rally so a technical update seems like a good idea Tuesday. The rally in the DXY is having a negative impact on the commodity markets and hurting the emerging markets that are commodity sensitive.
We discussed the Dollar Index in our 2021 forecast piece from December 28 when we wrote, "The U.S. Dollar Index has been in a downtrend since making a peak in March...In this daily bar chart of the DXY we can see a bullish divergence from the 12-day price momentum study. Notice the higher lows from June to August to December. The pace of the decline has slowed. This bullish divergence can be foreshadowing a recovery rally."
Let's check these updated charts.
In this daily bar chart of DXY, below, we can see that prices have rallied from their early January low. We can see a higher low made in late February along with higher highs in early February and now. The simple definition of an uptrend.
The moving averages are giving positive signals now with prices above the rising 50-day moving average line and above the bottoming 200-day line. The 12-day price momentum study shows equal highs in March even though prices made higher highs. This is a bearish divergence but the time frame is too short and not a concern at this point in time.
The slow stochastic indicator in the lower panel tells us that the advance is overbought but that is typical for the early stages of a rally. If the dollar continues to advance in the face of overbought readings it tells you the rally has "legs".
In this weekly bar chart of the DXY, below, we can see a more positive picture. Prices are trading above the bottoming 40-week moving average line. The 12-week price momentum study shows the big bullish divergence from August to December and the most recent "bars" of this history do not show any bearish divergence.
There is some chart resistance in the $93.00-$94.00 area but strength above $93.50 will tell us that the resistance could be overcome.
In this daily Point and Figure chart of the Dollar Index, below, we can still see a downside price target of $80 but we can also see that a trade at $94.55 could strengthen the picture.
Bottom line strategy: The charts of the DXY, above, are positioned for further gains. A rising dollar should put a damper on emerging markets and some of the commodity markets. Really strong commodity markets may not reverse direction but we may see their advances slowed. Timing-wise I would look for the dollar rally to begin to reverse direction by the latter part of the second quarter of 2021. We'll see.
