US dollar hits short-term resistance but longer-term outlook remains positive

Jason Sen

The monthly chart for the US Dollar Index below shows a good bounce off the 200-month moving average (the red line). This is just above the seven-year upward-sloping trendline of the rising channel. As long as the index does not collapse below 86.80, we will see the 100-month moving average (the blue line) cross above the 200-month over the summer for a longer-term bullish confirmation.

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The daily chart also shows bullish signals, with a breakout above the 14-month downward-sloping trendline at the beginning of last week. The push above the blue 100-day moving average gave us further bullish confirmation. However, as we become overbought on the daily chart, we have stalled at the 200-day moving average and first 23.6% Fibonacci resistance at 91.92.

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It is highly unlikely we can continue higher at this stage. The first leg higher as markets turn from a bear trend to a bull trend is usually slow with deep setbacks, because the bears are still quite aggressive, believing they remain in control. Therefore we could see a significant pullback now to the 100-day moving average at 90.60 and more minor 23.6% Fibonacci support at 90.50.

In fact we cannot rule out a dip as far as the 14-month trendline now at 89.95/89.90. But it is declining so, depending on how long it takes us to test the trendline, the value may be a little lower by the time we get there.
Clearly bulls need to sustain a break above 92.00 to prove me wrong and remain in full control. We would then target the January high at 92.64 (also the high for 2018 so far) then 93.00/93.05, and eventually as far as 94.15/94.20.

The monthly EUR/USD chart shows a similar picture to help back up our theory of a longer-term top for the euro versus the US dollar. The 200 and 100-month moving averages just below the 10-year trendline ensured the bulls were defeated as the trend reverses.

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In the daily chart below we see how the sell-off started as soon as the pair broke the one-year trendline at 1.2330 on 20 April. We spent the next week in a dive, initially targeting the blue 100-day moving average. We paused there for a day before dropping to what is now very important support in the short term.

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You can see the 23.6% Fibonacci and red 200-day moving average support at 1.2032/1.2013. In oversold conditions we are likely to at least pause here and trade sideways to ease these conditions.

Of course a bounce would ease these oversold conditions much more quickly. Watch therefore for a bounce to minor resistance at 1.2135. Stronger resistance at 1.2170/80 is, however, more of a challenge. If we continue higher this week look for a selling opportunity at 1.2235/45.

Failure to beat minor resistance at 1.2135 targets 1.2100/95 before important support at 1.2045/35. This could hold the downside but long positions need stops below 1.1990. A sustained break lower would be an important sell signal indicating that the longer-term negative outlook prevails.

Jason Sen

Technical Analyst & Trader

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