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Is the US Dollar Set to Rally?

Over the past few months, the US Dollar (USD) has been exhibiting a change in character from its previous tone throughout the first half of 2017.

In particular, the bearish downtrend that was in place through September 2017 may be at a turning point based upon recent price action coupled with underlying technical strength.

Near-term Perspective

Presently the USD is displaying several bullish technical factors on the daily chart.

First, USD moved clear above its downtrend as delineated by its 50-day Simple Moving Average (50SMA) into previous resistance at 94.00. Furthermore, at this juncture, the 50SMA is now acting as a level of support where market participants have stepped in to buy USD over the past few weeks.

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Accordingly, the strength of this level could be seen as an opportunity to get long USD.

Second, both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator built bullish divergence during August and September 2017. Typically, bullish divergences between price and an indicator precede a move higher in price.

In short-term, the move higher could go as far as the 200-day Simple Moving Average (200SMA) near 97.00 where USD would encounter previous support now turned potential resistance from May and June 2017.

For breakout traders, a close above 94.00 would offer an opportunity to get long USD with price confirmation in the move.

No matter if your preference is to buy off support or into strength, USD appears to be providing traders an opportunity to profit from an intermediate-term uptrend.

US Dollar Index Daily Chart
US Dollar Index Daily Chart

Long-term Perspective

Despite the possible bullish countertrend move underway on the daily chart, the long-term picture of USD is less compelling.

For example, USD spent all of 2017 reversing its breakout to new highs in late 2016 to now trade at new three-year lows between 92 and 93.

Additionally, the long-term trend as defined by the 200SMA is sloping downward indicating that traders should be short or flat the market, not long.

Furthermore, despite the positive divergence between RSI and MACD on the daily chart, the monthly chart displays the exact opposite. That is, bearish divergence occurred while USD made new highs in late 2016 and both MACD and RSI made lower highs. Accordingly, the price sold off throughout all of this year while the underlying price weakness was confirmed by both indicators.

US Dollar Index Monthly Chart
US Dollar Index Monthly Chart

Key Takeaways

Even though the USD may offer short to intermediate term traders an opportunity to profit from an uptrend, the longer term picture remains mixed.

Until USD can find its footing and reverse out of the price range it has been forming since 2015 traders should remain short or flat from a strategic perspective and find tactical long opportunities in any countertrend moves.

John DiRico is a trading and investment professional focused on technical analysis as well as alternative investment strategies. Additionally, he is the founder of the blog “A Discounted View” where he offers his observations on markets based on industry experience and topics covered in the Chartered Market Technician (CMT) curriculum. Please feel free to connect.

This article was originally posted on FX Empire

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