- Money Morning Australia

US Dollar Rallies. Readies for a Fall


Written on 26 November 2008 by Gabriel Andre

The US Dollar Index (USDX) has been now bouncing back by more than 18% since the bottom posted at mid-July. This low level was identified as the second leg of a “double-bottom” pattern which is a strong basis for a rebound (see on the daily chart). This is what happened and now the Dollar Index has already retraced 23.6% of the long-term bearish trend started in July 2001 and ended then at mid-July 2008.


Click To Enlarge

This long-term bearish trend (between points A and B on the weekly chart) drove the Dollar Index roughly from 125 to 72 therefore a loss in value of more than 42%. On the medium-term, the target is likely to be the resistance line plot just below the 38.2% Fibonacci retracement. It’s a previous high level where a “double-top” occurred (points C and D) that generated the second phase of the bearish trend, between 2006 and July 2008.

On the short-term, let’s use a system based a on multi-dimension oscillator to anticipate the price action. We use the Chande Momentum Oscillator (CMO).


Click To Enlarge

The CMO can be used to measure several conditions.

Overbought/oversold: the primary method of interpreting the CMO is looking for extreme overbought and oversold conditions. As a general rule, overbought levels are quantified at +50 and the oversold levels at -50. At +50, up-day momentum is three times the down-day momentum. Likewise, at -50, down-day momentum is three times the up-day momentum. Basically, these levels correspond to the 70/30 levels on the RSI indicator.

Trendiness: the CMO can also be used to measure the degree to which a security is trending. The higher the CMO, the stronger the trend. Low values of the CMO show a security in a sideways trading range.

Divergence: as is often done with other momentum indicators, divergences occur when the indicator does not confirm new highs or new lows posted by the price action.

Other: although not specifically dedicated to patterns recognition, the CMO may be also used to identify chart formations, failure swings, and support/resistance levels.

If we establish overbought/oversold entry and exit rules by plotting a moving average trigger line on the CMO, therefore alerts are triggered when the CMO crosses its 9-period moving average after being in an overbought or oversold condition.

It’s a short-term basic system that typically well identifies inflexion points.


Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.

Categories | Market News, US dollar

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery

openX sidebar signup form
Openx pos2
Latest Stock Market Updates
  • ^NDX4452.057+6.697 - +0.15%
  • ^FTSE6942.50-18.64 - -0.27%
  • ^AORD5868.600-5.100 - -0.09%
  • ^AXJO5898.900-5.300 - -0.09%
  • AUDUSD=X0.7816
  • USDJPY=X120.0275
openX sidebar banner
Openx pos7
3 Small Cap Stocks leadgen

Receive our unique and useful investments ideas straight to your inbox for FREE, enter your email to sign up:

x