US Dollar Index Showing Bearish Divergence at Extreme OverBought Conditions In Both Price and Time

Click on Chart or US Dollar Index to Enlarge

This chart is a weekly chart of the US dollar index with Commitment of Traders data below.  These charts are available at Barchart.com.  What is apparent is the massive rise in the speculative net long position, mirrored by the massive net short position by smart money/commercials.  So what does this mean?  A few things I believe...

• First long term, this trend is not done.  There will likely need to be at least a weekly time frame bearish divergence on the technical analysis to end the trend.
• By all measures, this move is historically extreme.  It is "overdone" and will likely result in a significant correction of the current uptrend in the relatively near term.

A few nuances of the chart suggest to me that the top for this leg up is close at hand.  First, there is a lower high in the speculator's positions in the last few weeks, creating a divergence that is typical of the end of a move, and is seen at all the other tops of importance on this chart as well.  Second, open interest is at a considerably lower point than its peak for the uptrend.  This also shows decreasing participation in the uptrend, and suggests that the leg up is ending.  You can also see the open interest (purple line in middle pane) make lower peaks as price reached ultimate peaks in the past.

So when can we expect the move to end?

One technique I have discussed before on this blog is the use of an upper channel line combined with technical divergence.  

Click on Chart of UUP etf to Enlarge

This chart is the UUP etf which is an unleveraged 1:1 mirror fund of the US Dollar Index.  I have shown an upper channel line in the chart, and price is just below it.  Certainly price could top right here, but a touch of the channel on further strength would be a great exit into strength in my opinion if you are long.

Also note the sharp bearish divergence on the MACD study in the lower pane.  View this as a "set-up" indicating that shorter term signals can be used for exit of longs or entry of shorts.

If the MACD now crosses down it would be a very simple exit signal that I think should be respected.  However, if price breaks to new highs, I would have to suggest covering a short position, but be willing to re-enter if there is yet another bearish signal while the divergence maintains.  

That being said, trying to catch a correction in a trend is not where most people will make consistent money.  The best idea may be to wait for a sell off in coming months, and then get serious about timing entry on the long side in expectation of a break to yet higher high later this year.

Pete