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Dollar Index: Bullish

The last time I looked at the Dollar Index was on September 2, 2011, and I made the statement: "The Dollar Index is making an attempt to close above the nearby key pivot level at 74.62. A weekly close above this resistance level would likely turn the trend from down to up." Not only is the Dollar trading at 78.5 (~5% over the key pivot level), it is also above its simple 10 month moving average. This is bullish.

A simple strategy, utilizing monthly charts of the Dollar Index, is to buy the Dollar on a monthly close greater than its simple 10 month moving average. My sell signal is the presence of a negative divergence between price and an oscillator that measures price momentum or a close back below the simple 10 month moving average. Now the purpose of this study is not to derive a Dollar trading strategy or to show you how wonderful I am. The purpose is to define those times that the Dollar index is in an uptrend.

Since 1979, this strategy generated 22 trades, and as it turns out the trades were evenly distributed over the last 3 decades with about 7 trades occurring in the 1980's, 1990's and 2000's. 68% of the trades were winners, and the average trade lasted 7 months. Such a strategy yielded 79 Dollar Index points while buy and hold netted negative 10. This strategy produced the following equity curve.

Figure 1. Equity Curve
Equity Curve

This equity curve and strategy defines those times when we should expect the Dollar Index to rise. A close over the simple 10 month moving average is bullish for the Dollar Index.

In the next articles, I will look at how gold and equities have performed over the past 10 years when the Dollar is in a bullish trend.


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