I wrote about the Dollar Index (DXY) in early April, saying, "I don't know what economic circumstances will turn the dollar lower but I would be cautious about its strength continuing for much longer."
Well, prices continued higher and higher and I am back with my "boy who cried wolf message" yet again.
Let's revisit the DXY chart as the financial media runs with stories of "the dollar at a two-decade high." Oftentimes when journalists run headlines like that one a market has typically been close to the end of a move.
In the daily bar chart of DXY, below, we can see what technical analysts call a parabolic rise. If the DXY was a stock and rose from 90 to 104 we would not be too impressed but this is a massive move in the world of currencies. Prices have rallied and moved further and further away from the rising 200-day moving average line. Securities that get too far above (or too far below) the 200-day line often react in the other direction.
The slow stochastic indicator has been in overbought territory all month, which I think is relatively rare. The 12-day price momentum study shows us equal highs in March and April (think double top), which is a category of bearish divergence when compared to prices making higher highs.
In the weekly Japanese candlestick chart of DXY, below, we can see the big rise from early 2021. Prices are extended (overbought) on the upside and the slow stochastic indicator is at its highest reading looking back three years.
In this Point and Figure chart of the ( UUP) , the Invesco Dollar Index Bullish Fund ETF, below, we can see an upside price target of $29.34 but also that on this instrument there is overhead resistance up to $28.80. This difference versus the Dollar Index might be considered a bearish divergence of sorts. The Dollar Index (DXY) is not an exchange-traded instrument so we really do not have the same technical indicators and volume information.
Bottom-line strategy: Again, I have no idea what economic circumstances will turn the dollar lower but I find it at a technical juncture where the long side is extremely risky. I don't think this will be one of Aesop's fables.
