US Dollar Relieving Overbought Condition

(Please note that this article is taken from www.traderdan.com).

It is no secret that the currency flavor of the year has been the US Dollar. King Dollar has reigned supreme over the Forex markets especially since this summer when it began a torrid bull move higher breaking out above 81 and making a run to near 87 before it caught its breath and backed down a bit. It decided to run some more, this time to 88.50 before again pausing.
 
Right now, the currency markets are rather subdued thanks to the US holiday ( don't blink however because it all might change!). There has been some movement in the major crosses but not that much to speak of in terms of anything significant. It seems that for the moment, traders are content to let the various pairs meander in some tight ranges.



In looking over the chart of the US Dollar Index (USDX), the currency unit seems to be consolidating in a tight range between 88.50 on the top and 87.50-87.25 or so on the bottom.
 
I have drawn in a shaded rectangle to denote the region where it is encountering some buying.

If you look down at the indicator on the lower plot, you will see the RSI or Relative Strength Indicator, an old but helpful measure of buying or selling internals. Note that since the strong bull trend started in July, the RSI has ranged exactly where it ought to range for a market in a bullish posture - it has not dipped below the 40 level ( see the lower dashed line).



To show the strength of this move, look at how long the RSI has remained above the 80 level, which is considered overbought.

The recent leg higher has produced a negative divergence ( higher high on price not confirmed by a higher high on the RSI) but the market thus far is unconcerned about this, so we will also remain unconcerned. We know this because the lower part of the range remains intact.



The market appears to be working off the overbought condition by moving sideways, allowing the RSI to fall towards the 40 level ( see the shaded rectangle on the RSI insert). The longer the Dollar can move sideways with the price remaining above the support zone on its plot AND the RSI remains above the 40 level ( and the rectangle), the more the odds increase that this is just another pause before the next leg higher in the US Dollar. Traders will want to monitor this closely the next week or so.

If the Dollar were to fall through its support, we would not want to see the RSI fall below 40. That would introduce some doubt as to the staying power of the current leg higher and would bode for a deeper correction. Let's keep an eye on this.

Those who are actively working gold, especially, will want to monitor this most closely.