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Dollar Index: Technicals and Trading Model Remain Bullish

About 1 month ago, I presented my Dollar trading model. This is a simple strategy, utilizing monthly charts of the Dollar Index. The entry signal is 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. This model triggered a buy signal 1 month ago.

As October came to a close, it wasn't clear if the model would end the month above its simple 10 month moving average. It has and the model remains bullish. As I have previously detailed, over the past 10 years this has been a definite headwind for equities. When the Dollar trading model is bullish, equities are vulnerable. It should be noted that the average trade from the Dollar Index model lasts about 7 months; we are now starting month 2!

The technicals are shown in this weekly chart of the Dollar Index. See figure 1. The black dots are key pivot points, which represent the best areas of buying (support) and selling (resistance). Back on September 2, I made the following statement regarding the pivot at 74.62: "The Dollar Index, see figure 1 for a weekly chart, is making an attempt to close above the nearby key pivot level at 74.62. A weekly close above this resistance level would like turn the trend from down to up....So pay attention and watch that pivot! The macro winds may be a changing." Over the past two weeks, the Dollar Index tested the 74.62 support level, and by month's end closed above its simple 10 month moving average. This is classic bottoming and bullish price action.

Figure 1. Dollar Index/ weekly
Dollar Index Weekly

As far as equities go, I would remain cautious for many reasons (including high likelihood of recession). Despite the recent, positive price momentum (i.e., trading models turning positive), a bullish Dollar remains a headwind for equities.


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