The U.S. dollar has been on one wild roller coaster ride.
From May 2021 to September 2022, the U.S. dollar index (DXY) surged over 28%. That’s an incredible rally for any currency, let alone the dollar.
For additional context… prior to its monster move in 2022, the dollar traded in a 14% range for the last four years.
This volatility isn’t going anywhere either…
Since topping out in September 2022, the dollar has given back over 50% of its gains.
It’s possible that the dollar has put in a major top, and we’re still in the early stages of a new bear market cycle. But whether that’s true or not doesn’t matter to me as a currency trader…
A Comeback for the Dollar
In fact, one of the reasons I love trading the foreign exchange (forex) market is because one currency can’t go up in value without another going down.
The value of one currency is always relative to the value of another.
So, whether the dollar is going up or down, there’ll always be a great forex trade just a few moments away.
But right now, in the case of the U.S. dollar, I think we’re going to see a bit of a comeback.
Let’s look at a short-term chart of DXY to see what I mean…
There are two important things going on here…
First, DXY is trading within a falling wedge pattern (blue trendlines).
The key characteristic of a falling wedge is how both trendlines are pointing down, containing prices. Eventually, those lines will meet one another. That’s what gives the pattern its wedge-like shape.
A wedge is typically a reversal pattern. The pattern is complete once prices break out of the upper trendline. A completed wedge usually sees prices travel back to the start of the pattern.
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For DXY, that would mean a move back to at least the 103.35 level – the peak on January 10.
The second thing going on with this chart is the extreme bullish divergence in the Moving Average Convergence Divergence (MACD) indicator at the bottom of the chart.
The MACD measures momentum and can often be a leading indicator for big moves.
Notice how as the dollar traded lower throughout January, the MACD started to trend higher. This is what technical analysts call bullish divergence.
The combination of bullish divergence and the falling wedge tells me there’s hidden buying pressure in this market.
Eventually, that pressure won’t be able to build anymore, and it’ll have to be released.
When that happens, I expect to see DXY break out of its wedge and trade higher toward 103.35… ushering a potentially profitable opportunity for traders.
Happy trading,
Imre Gams
Analyst, Market Minute
P.S. Last night, Jeff Clark shared one of his most urgent warnings yet about a market anomaly that could cause 44 days of extreme volatility…
Jeff says that if you’re just buying and holding stocks… you’ll get slaughtered. But if you follow his “crash-proof” strategy, then you could make more money in the next 44 days than most people make in an entire year… even if stocks are crashing.
If you couldn’t watch the entire interview last night, I highly recommend you click right here to watch the replay and learn how to prepare for the next 44 days.
Reader Mailbag
What do you think will be the dollar’s next move?
Let us know your thoughts – and any questions you have – at [email protected].