Originally published by guppytraders.com
The fall in the USD from $0.975 to $0.95.7 is not a complete surprise. However, it comes as a contradiction to the strength of the underlying trend. There are two technical indicators at play, and each provides a different conclusion.
The first technical indicator is used to establish the strength of the trend. Any price activity is then judged in relation to trend strength.The underlying trend, shown by the Guppy Multiple Moving Average indicator is persistent.
A strong trend is indicated by a steady degree of separation in the long term GMMA. The rate of separation has been steady, but not particularly wide. This shows steady trend support. The lower edges of the long term GMMA have been tested several times by price dips, followed by rebound rallies and a continuation of the uptrend.
The most bullish interpretation of the current price activity is for traders to go long in anticipation of a new rebound rally and a move above the resistance level near $0.97.
A breakout above $0.97 is bullish for the US dollar with a longer-term target near $100.5.
The second technical indicator delivers the opposite message. This is a strategic rather than tactical analysis. The RSI indicator shows a bearish divergence. The new highs in the dollar, shown as A, B,C and D have not been matched by new highs in the RSI. The trend line across the peaks of the dollar price movement is an up sloping trend line. The RSI trendline for the same time period a down sloping trend line.
This is a bearish divergence and it usually suggests that the dollar will be unsuccessful in any breakout above the $0.97 resistance level.The current dollar retreat supports this conclusion. Divergence analysis is accurate around 70% of the time and its increasingly looking as if this may be one of the exceptions.
The RSI divergence pattern is often associated with a change in the direction of the trend so this suggests that this current pullback may be part of a trend change rather than a continuation of the rally and retreat pattern.
Traders wait for further action to determine which of these indicators provides the most accurate reading. A rebound rally from the lower edge of the long term GMMA. And a move above resistance near $0.97 will confirm continued uptrend behavior with the dollar.
A continuation of the fall below the lower edge of the long term GMMA will confirm a trend change with a downside target near $0.945. This would confirm the validity of the RSI divergence signal.
Aggressive traders will take early long positions in anticipation of a rally and a breakout. Conservative traders will wait for confirmation of a breakout or RSI confirmation of a trend change before taking new positions.