05/29 - Improved risk appetite crushes the Greenback

The US Dollar Index started to show signs of improvement as key levels held and bullish MACD divergence signals began to materialize. Thursday's morning reaffirmation of New Zealand's credit rating eased risk aversion, causing the Greenback to reject at the 10-day MA once again. The successful 7-year auction reversed sentiment on Wall Street enabling risk appetite to flourish. The follow-through in Asian trade allowed the EUR/USD to clear a corrective trendline, causing the dollar to collapse to fresh lows.

As mentioned before, a failure at a fast moving average (such as the 10-day MA) and a quick retracement to new lows indicate that the DXY (US Dollar Index) is still in a dangerous mode of capitulation. Although, daily studies remain oversold, generally a selling climax is required to exhaust the selling pressure. In the meantime, until the 10-day MA is cleanly broken, levels to watch are: 78.89-99 (projection cluster), 77.69-89 (fibonacci retracement/December 2008 low) and 74.70-79 (fibonacci cluster).

05/22 - Dixie (DXY) down and out?

The US Dollar Index ended the previous week with hopes of marking a bottom. However, a renwewed improvement in risk appetite on the back of Monday's election results in India caused the Greenback to reject at the 10-day MA. Failing at a fast moving average after such a sustained period of weakness and the inability to regain the keenly watched 200-day MA suggested that the dollar was about to enter a period of capitulation.

Wednesday's FOMC minutes which pointed out that the Fed would up the level of quantitative easing added pressure to the DXY (Dollar Index) and Thursday's stingy coupon pass spooked the bond market. The subsequent buyback announcement reminded markets of the government's massive debt obligation, causing investors to ponder Uncle Sam's AAA credit rating.

While sentiment towards the dollar remains extremely bearish, several technical indications hint at a possible reversal. First, seasonal factors that usually cause the buck to fall throughout April then recover in early May were delayed and could now materialize to help buoy the currency going into June. Moreover, the adage "sell in May then go away" could be coming to fruition as the Dow Jones Industrial Average just confirmed a double top formation on Thursday. Although, the normal correlation between risk aversion and dollar strength decoupled this week, this should be a temporary phenomenon and further equity weakness will boost the dollar going forward. Second, virtually every daily study remains at oversold levels and MACD is indicating possibe bullish divergence. Last, according to Elliot Wave analysis, a symmetrical zig-zag correction has been completed.

In capitulation type sell-offs, typically a reversal day (ie, a lower low with a bullish close) is required to exhaust the selling climax. If key levels such as 80 and 1.40 hold for the DXY and EUR/USD, respectively, then an inside day (price range is entirely within the previous day's price range) followed by an accumulation pattern should fullfill the requirements for building a base. Eventually, the clearance of the 10-day MA is required to stabilize the current selling pressure. In the meantime, any counter-rally that is followed by a quick retracement to new lows should serve reason for dollar bulls to be cautious.

[STRATEGY] LOOK TO BUY (SELL EUR/USD)