Study: the U.S. Dollar is overbought. Not necessarily bearish for the USD


The U.S. Dollar is overbought. The Pring Dollar Diffussion Indicator measures the U.S. Dollar’s breadth by looking at how many USD-foreign currency pairs are above their 40 day moving averages.
The Pring Dollar Diffussion Index is currently at 12, which suggests that the USD is overbought against most major currencies.

This is the second highest reading in 20 years.

Standard technical analysis teaches us that the market will go down when it’s “overbought”. But does that belief actually stack up against reality?
There are only 2 historical cases in which the Pring Diffussion Index reached 12.
We can relax the paramters and see what happens next to the USD Index when its Pring Diffussion Index reaches 10.

Click here to download the data in Excel.

Conclusion

As you can see, the U.S. Dollar doesn’t always immediately go down when it is overbought.  Sometimes it needs to rally more before going down.
I don’t think the U.S. Dollar will start to reverse downwards immediately right now. The USD Index is clearly trying to rally on trade war related news. And with Trump unwilling to back down very quickly, these trade war threats that are holding up the USD aren’t going to disappear soon.
That being said, I still think the U.S. Dollar Index is in a bear market.

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