As of 1/20/2011 the US Dollar Index is on a Trend Model SELL signal; however, it began to rally at the beginning of this month. After the initial rally launch, there was a period of consolidation. Then on Monday there was a clean break above the congestion area, and it seemed clear that the Index was headed for a challenge of the declining tops line drawn from the June 2010 top. That line was the top of a large falling wedge pattern that we normally expect to resolve upward.

Since the top earlier this week, the Index has shifted into a mini-collapse that quickly violated the short-term rising trend line, and changed the outlook from moderately positive to negative. Note that the 20-EMA was very close to crossing up through the 50-EMA, which would gave generated a Trend Model buy signal. Now the Index is below both EMAs, meaning that they are now declining and diverging. The PMO has topped.

The weekly chart shows that long-term overhead resistance is still an issue, and we can see that the Index turned down prior to reaching either of those lines of resistance.

Bottom Line: Several weeks ago it appeared that the Dollar Index was on the verge of a total collapse, and immediately after I said that, the rally began. At that point I said that a possible outcome would be that the bear market rally in the dollar would fail before it was able to cause a new buy signal to be generated. That is what appears to be happening now. The next thing we should expect is a retest of the May lows.

While we attempt to interpret the day-to-day squiggles and to anticipate what is going to happen next, let’s keep in mind that the Dollar Index is in a long-term bear market. Our expectations should be