Will the USD Continue its Decline?

This week the US Dollar (USD) is exhibiting another textbook breakdown below its most recently formed support level.

These new lows come after USD’s decline into the beginning of August 2017 which created oversold conditions on multiple time frames and tested long-term support levels around 93 as well.

Daily Perspective

On the daily chart, the price displays a series of lower highs and lower lows, commonly referred to as a down trend. Additionally, we see the slope of the 50-day Simple Moving Average (50SMA) clearly delineating the decline in the USD.

The 50SMA is an excellent gauge of intermediate term investor sentiment. Accordingly, institutions and other market participants have been stepping in to sell more USD when the price approached its 50SMA over the past six months which is typical for a sustained downward.

From a strategic perspective, the 200-day Simple Moving Average (200SMA) is also sloping downward which implies that the long-term trend in place is down for USD.

Furthermore, the reading on the daily Relative Strength Index (RSI) became very oversold during late July and early August 2017 while never recovering to anywhere higher than mid-range during any rally attempt in price. This behavior is characteristic of a strong down trend as price continues to get oversold while exhibiting weak attempts to recover.

However, the most recent breakdown in price has yet to cross into oversold territory. As such, traders should watch for continued weakness in USD that would confirm the down trend or for any bullish divergence that emerges between USD and its daily RSI.

Nonetheless, looking at a trend indicator like Moving Average Convergence Divergence (MACD) we see confirmation between the most recent lower highs, adding further credibility and showing an internal strength of the down trend. With a bearish crossover confirming the breakdown in USD traders should watch for any reversal to a bullish crossover or bullish divergence that develops.

Weekly Perspective

The weekly chart displays a similar picture of USD price action.

For example, support at 93 was breached this week, maintaining the oversold reading by RSI. Markets in a downtrend will continue to register oversold readings and are indicative of internal price weakness.

Additionally, this weakness has followed the strength that pushed USD above the psychologically-important 100 level before reversing swiftly throughout all of 2017. Accordingly, this price action has caused the long-term trend indicator, the 40-week Simple Moving Average, to begin sloping downward.

Similarly, the Average Directional Movement Indicator (ADX) has held its –DI over its +DI since March of 2017 indicating negative price trend bias. Couple this observation with a rising ADX line that defines the trend as strong with its weekly reading over 40.

Monthly Perspective

On the monthly chart of USD, there are several causes for concern.

First, when price made new highs above 100 during late 2016 both RSI and MACD did not reach corresponding overbought or new high levels, respectively. In other words, bearish divergence has emerged on the monthly chart between USD and its RSI and MACD.

However, the RSI has yet to become oversold which would either indicate a sustained breakdown in long-term price action is pending or a meaningful reversal could occur.

Additionally, since 2015 USD has formed an expanding triangle pattern on a monthly basis. As such, we could see USD decline to around 90.00 before finding any buying interest. Expanding fans are built through markets that are slow to bid prices higher but swift to sell prices lower. This slow buying demand is part of the calculation for RSI that allowed for it to never reach overbought conditions despite USD making new price highs.

With the break of recent support at 93 on the monthly chart as well as other time frames, traders should watch for some interest to enter the market near 90.00 for an oversold bounce unless a significant decline emerges from this level.

Key Takeaways

Despite the very oversold readings and breakdown of support levels on multiple timeframes, USD has yet to see any buying demand stepping into the market.

Traders should look for any divergences between USD and its trend indicators or oscillators that could point to a potential bottom reversal in the coming days or weeks.

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.