Wednesday, October 10, 2007

Using the ADX Indicator on the US Dollar

Ever since this site was started in June, I have been very bearish on the US Dollar for the long-term. But even though the currency is in a powerful bear market, it still experiences counter-trend bounces, and one of these bounces may now be in the cards.

It is tougher now to pick bottoms in the US Dollar, because it is no longer contained in a descending wedge like it used to be, and the dollar is literally in uncharted territory. In other words, there is no support levels below. But there are other techniques that we can use.

One indicator that is useful in helping determine trend changes is the ADX indicator. This indicator illustrates if a security is trending or not. It does not differentiate between upward trending or downward trending. Here is a daily candlestick chart of the US Dollar Index:

The ADX indicator is shown on the bottom. The line that is most important is the thick red line. I have draw a horizontal line at 20 and 40. When the red line crosses over 20, then that indicates that the security is trending quite strongly.

When the red line crosses 40, that tends to indicate that the trend has just about exhausted itself. In the above chart, notice that whenever the ADX is over 40, the USD is close to bottoming out.

Also, in the above chart, the 9 day RSI is not an effective indicator. This ties into the previous post made, and is due to the fact that the RSI does not take into effect the long-term trend of the security. Using 2 Relative Strength Indexes for the US Dollar would be appropriate, in my opinion.

In conclusion, the US Dollar appears to have limited downside left for the short term. In the days ahead, this could put downward pressure on gold and silver. If you have any comments, suggestions, or criticisms please write a comment below, or send an email to


The Word said...

Good point.
Learned about the horizontal 20,40 from you today. You always have some tricks up your sleeve it appears to me.
Today I have a question:
I am aware of precious metals "weakness" in the short term and your ST view. However, I see that the South Afica market is booming (EZA) and it is usually moving with Gold. I was wondering if you had done any work on this relationship?

The Word

Danny Merkel said...

The Word,

I've noticed correlations between gold and many other markets such as the Japanese Ishares (EWJ), the Swiss Franc, and the Australian Dollar, but never with the South African Ishares.

I made a chart showing gold versus EZA, and you are correct. There certainly is a correlation between the two, which makes sense.

I know on your blog you focus on the TSX. When I pulled up the EZA chart, I noticed that it closely resembles the TSX as well.

But, as you probably know, the Ishares are hitting new all time highs, while the TSX is not. However, when comparing the ETF to the TSX in Canadian Dollars, the TSX is doing much better. I guess this shows that any gains made on US Dollar holdings are not what they appear.

Anonymous said...

Another issue mentioned by some is the possibility of PMs delinking from the dollar and other currencies if/when confidence in fiat currencies begins to flag.

BTW, this is a good blog site.

Danny Merkel said...

Dear anonymous,

That's a good point. I feel that may already be happening, as gold is increasing relative to all other major currencies.

It just may be to varying degrees from one currency to the next. I'll have to get some charts showing this in a future post.

Thanks for the comment.