I was wrong about the dollar.
A few months ago, I told readers the decline in the US dollar was just about over. The buck was oversold. Technical conditions were stretched quite far to the downside. It seemed to me there wasn’t a lot of fuel left to push the dollar much lower.
So, for folks who had bet on the dollar falling in January based on the bearish setup I wrote about back then, I suggested taking profits on that trade.
Since then, the U.S. dollar index has fallen another 6%. It closed recently at its lowest level in over three years. The “short-the-buck” trade would have been even more profitable.
We left some money on the table.
But, at least I didn’t recommend buying the dollar – which would be a losing position right now. I was tempted – to be sure. The buck was oversold. Conditions were stretched. And, I didn’t think there was much downside left.
But, the dollar’s setup in March lacked one of the key conditions I look for before making a long trade…
Confirming the Move
It lacked positive divergence. The various momentum indicators I follow were moving lower right along with the dollar, which confirmed the decline.
And, while any further downside seemed limited to me, the lack of positive divergence suggested the dollar wasn’t ready to reverse right away.
Today, though, we have a different story. Look at this updated chart of the dollar index…
As the dollar index has been making lower lows over the past three months, the momentum indicators at the bottom of the chart have been making higher lows.
This sort of “positive divergence” is often an early warning sign of a reversal to the upside.
The dollar is oversold – just as it was in March. The moving averages are extended far away from each other – also just like March. This time, though, we now have positive divergence in place as well.
It sure looks to me like the dollar index is forming at least a short-term bottom.
So, while I didn’t recommend buying the buck in March, the current setup looks like that could be a good trade for aggressive traders.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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