Market turns almost always occur with divergence. The most commonly recognized divergence is momentum (such as RSI) divergence whereas a new high is not confirmed by a new high in momentum and vice versa. A different kind of divergence occurs when similar markets fail to confirm new highs or lows. Equity technicians watch the Dow Industrial average and the Dow Transportation average at potential turning points. If one index fails to confirm the other’s new high or low, then the probability of a reversal is increased. This dynamic has occurred on 3 occasions since mid 2008*.
July 2008: Euro trades above prior high set in April 2008 but USD index fails to drop below April 2008 low - [B]USD bullish reversal[/B]
March 2009: USD index trades above prior high set in November 2008 but Euro fails to drop below November 2008 low - [B]USD bearish reversal[/B]
Now: USD index trades below prior low set in December 2008 but Euro fails to exceed its December 2008 high - [B]USD bullish reversal?[/B]
*there have been other instances of this divergence, but I am only showing the most recent instances in this report
This is a chart that I have shown numerous times over the last year. It is important to keep in mind how important a USD turn may have occurred at 1.6000. Since the end of the Bretton Woods era, the EURUSD (DEM rates are used before 1998) exchange rate has exhibited a long term rhythm of roughly a decade up and six years down. If the rhythm holds, then the EURUSD is in a multi-year bear market.