Canaries were carried down a coalmine in cages to alert the minors to dangerous fumes. If the canary died then it was an early warning of poisonous gasses. In modern markets there are several relationships, or lack of relationships, that act as a canary in the coalmine.
A strong dollar makes imports cheaper and US exports more expensive. US market strength is most often accompanied by US dollar strength. This relationship seems less strong than it has been historically. The US Dollar Index is captured in a sideways trading band. The lower edge of the band is near $0.93 and the upper edge near $0.97.
There is a weak directional bias and its fair to say the underlying secular trend is bullish. However, it is not strongly bullish. The US dollar index has unsuccessfully tested $0.97 three times since mid-2018. With each test the dollar has been forced into a retreat. This rally and retreat process has been in the context of a mild uptrend.
The US Dollar is again approaching the resistance level near $0.97. Its been a strong rally to this level so many traders believe there is an increased possibility that a breakout may develop. A breakout is bullish for the US dollar with a longer term target near $100.5
This breakout remains a possibility but the RSI indicator shows a bearish divergence. The new highs in the dollar have not been matched by new highs in the RSI. The trend line across the peaks of the dollar movement is an upsloping trend line. The RSI trendline using the peak above 70 shows a down sloping trend line. This is a bearish divergence and suggests that the dollar will be unsuccessful in any breakout.
We apply RSI analysis only to the peaks above the 70 range or below the 30 range. All other RSI activity is just market noise and has no significance. Strategic analysis is applied to the weekly chart.
Traders will move to a bearish stance and are ready to go short if the dollar shows confirmation signals of weakness with a retreat from resistance near $0.97. The canary in this coalmine is the RSI divergence.
Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.