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U.S. Dollar Index, The Trend Is Your Friend

Currencies / US Dollar Sep 18, 2009 - 11:38 AM GMT

By: Guy_Lerner

Currencies

In identifying the Dollar Index (symbol: $DXY) as the key asset class to watch, I relied upon two strategies for guidance to make the call on June 19, 2009 that that this was a "Very Dangerous Time For The Dollar Index". So far, things are working out as expected.


The first strategy sold the Dollar Index short on any close below 3 pivot low points. Positions were covered on a close above 3 pivot lows or a close greater than the 40 week moving average. The second strategy sold the Dollar Index short on any close below a positive divergence bar. Positions were covered on a close above a positive divergence bar or a close above the 40 week moving average. In both strategies, weekly data were utilized.

Both strategies identified price patterns that suggested the Dollar Index would fall and there would be a high likelihood that that fall would be significant. In the first strategy, the average trade lasted 23 weeks, and in the second strategy the average trade lasted 14 weeks. The discrepancy in the average trade length was due to the fact that prices really accelerated lower on closes below positive divergence bars as traders looking for a bottom throw in the towel to cover losing positions. This trade or the second strategy made its gains, which were almost equal to strategy 1, over a much shorter time frame.

With regards to the first strategy (i.e., close below 3 pivots), the sell signal has been in effect for 8 weeks. For the second strategy (i.e., close below positive divergence) the sell signal has been in effect for 4 weeks. So what is my point? This weak dollar trade has yet to reach an average duration in time. In the Dollar Index, the trend is still your friend until it ends.

Reinforcing this notion that this trend in the Dollar Index could persist for longer than most expect comes an editorial from Bloomberg entitled, "Hedge Funds' ATM Moves From Tokyo to Washington: William Pesek". The writer basically argues why the Dollar Index will remain lower than many of us think. Essentially, a higher Dollar risks another episode of deleveraging. As Pesek points out:

"Think about the turbulence that would be unleashed by the dollar suddenly shooting 5 percent or 10 percent higher with untold numbers of traders around the globe on the losing side of that trade. It could make the “Lehman shock” look manageable."

In essence, the Federal Reserve and Treasury have a lot at stake and will likely continue the policy of devaluing the Dollar.

I want to thank Trader Mark at FundMyMutualFund for bringing this article to my attention.

    By Guy Lerner

    http://thetechnicaltakedotcom.blogspot.com/

    Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

    © 2009 Copyright Guy Lerner - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Guy Lerner Archive

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