It has been a rough year so far for the U.S. dollar.
The U.S. Dollar Index ($USD) peaked at 103 on the first trading day of 2017. It has been trending lower ever since.
On Monday, the index closed near 92 – its lowest point of the year. The dollar is now down almost 11% in 2017.
But it looks to me like the buck is gearing up for a bounce.
Take a look at this chart…
For all of 2017 – during the dollar’s relentless decline – whenever $USD dropped to a new low, the key technical indicators (like the MACD and RSI) also dropped to new lows. This sort of “confirming” action in the indicators is a sign of a strong downtrend – one that was not ready to reverse.
Now, though, the indicators are telling a different story.
The dollar dropped to a new low on Monday. But both the MACD and RSI are well above the lows they hit earlier in August. This “positive divergence” tells us the strength of the downtrend is fading. This is an early sign that the dollar may be ready to reverse and start moving higher.
Of course, technical divergence by itself isn’t enough to justify aggressively buying the buck. It’s usually best to wait for some small display of strength – like having the dollar gap lower one day and then slowly reverse the loss and close higher on the session. That sort of move, at the end of a long downtrend, often exhausts all the sellers.
And that is exactly what happened yesterday. $USD gapped lower – down 0.5%, which is a big daily move for a currency – and then slowly reversed and closed up 0.1%.
This action, combined with the positive divergence on the chart, is a pretty good indication that the buck is ready to rally.
Best regards and good trading,
P.S. Do you think it’s time to bet on the dollar? Let me know your ideas – along with any other questions or suggestions – right here.
For today’s Mailbag, a few responses to yesterday’s Market Minute, “Why I’m Trimming Some Gold Stock Profits”…
I am new to your service, and to my regret I never did the gold trade. I am a lot like your friend – I always let my emotions get the best of me.
You are teaching me a lot, and I truly appreciate you. I really look forward to your insights every morning. Thank you so much for all you do, I truly don’t know what I would do without you!
– Dina, Market Minute Reader
I bought a lot of junior gold stocks in July last year, and I was happy to see how much and how fast they moved higher… just short fun! They all pulled back for a loooonnnnggggg pullback. It’s frustrated me and was painful for my portfolio.
Now, since I’m with you, Jeff, I feel more confident for the rest of the ride. I can hedge my position with call/put options to boost or protect my stocks. Like your friend, I’m sure that I was right, but it must be a bumpy ride and maybe longer than I think! But that’s it – I go forward with more short-term tools now! Thank you for your good advice!
– Fabien, Delta Report Member
And some kind words from subscribers of both the Market Minute and the Delta Report…
As other readers have pointed out, we really appreciate the way you take the time to explain the concepts and thinking you use as a trader. As a former teacher myself, I can tell you are a natural teacher. I’m very happy I subscribed to your Delta Report thus far and looking forward to continuing to follow your work in the future.
– Eric, Delta Report Member
Thanks for your help over the years and for your new free newsletter. I like the way you think.
– Jerry, Market Minute Reader