Diary of a Financier

US Dollar’s 1996 Analogue: Secular Setup

In Capital Markets on Mon 22 Oct 2012 at 21:24

The US Dollar Index (DXY) literally topped-out the day of my last dedicated entry about the greenback. That’s when I sold my USD ETF (UUP), at the pinnacle of the classic Cup & Handle breakout through its rim resistance. Since then, DXY looks to have found support just under 79, and a Head & Shoulders top is developing.

Currently trading at $79.55, DXY is bouncing off that neckline support and looking to rally up to a right shoulder ~$81.85. On the daily chart, you can see the bear divergence that led to a pullback from May’s highs. Now, a weak bull divergence¹ is bubbling in the weekly fractal, but the monthly shows significant bull divergence indicative of a secular bull reversal in store for the long-term:

DXY daily/weekly/monthly- H&S top developing, may rally up to $81.85 R shoulder resistance; big bull divergence in monthly signals secular bull reversal

There’s an argument there between the daily H&S top (bearish) and the monthly bull divergence. Generally, those are mutually exclusive developments. However, a historical precedent provides an overrule: DXY is still tracking its 1996 analogue in lockstep. The same argument arose in 1996–long term bull divergence and a shorter term H&S top pattern. Back then, the H&S held neckline support after resistance was tested at the right shoulder. The classical pattern failed. The rest was history, as a 42% rally ensued over the next 4½ years:

DXY 1996 v 2012 analogue (weekly)

–Romeo

¹Because of summer 2011’s deep trough, I can argue that MACD doesn’t exhibit bull divergence as much as an affirmation of the symmetrical wedge that’s evident in the weekly chart.

Advertisements
  1. […] Strong dollar policy and anti-QE rhetoric are bearish developments for Gold–and I recently resurrected my short term & long term USD/DXY bull […]

  2. […] Dollar Index (DXY)- USD has traded alongside its 1996 analogue: it found resistance at the right shoulder of a false Head & Shoulders top two weeks ago, and […]

Comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s