The US dollar breaks lower: what next?
The US Dollar Index had important Fibonacci support around the 101.00 area. Moreover, we have the two peaks from the 2015 highs at 100.39 and 100.51. This important support area has been thoroughly tested as we dipped as far as 100.26. As I write, however, we are trading at 100.67, so just holding above two of the important levels.
The key to the short term can be seen on the four-hour chart. A potential bull flag has been developing over the past two weeks.
We have just bounced off the lower trendline of the downward-sloping channel. If we were to bounce towards the top of this channel we could reach the 101.90/102.00 resistance area. This would occur around the end of this week or the beginning of next week.
So if we bounce this far, or even as far as the important resistance on the daily chart at 101.00, I think the index could take a big tumble down towards an important support area at 99.30/99.20. Once we test this area there is a strong chance that the correction will end. Then the longer-term bull trend would resume.
Focus on USD/JPY
USD/JPY unexpectedly broke through very important support around the 114.60/114.50 area. I really did not think it would break but when it did we plunged very quickly on Tuesday, hitting a low of 112.58.
In the short term the pair is seeing a recovery. If you look at the four-hour chart below, we see a similar potential flag formation and downward-sloping channel. On the first test of the lower trendline of the channel we seem to be bouncing to ease the short-term oversold conditions. In this phase we could eventually reach towards that important area at 114.50/114.60.
This key level ties in nicely with the upper trendline of the channel. Therefore we could turn around here and see one final leg lower in this correction phase.
If we look back at the daily chart above, we can see the next Fibonacci target on the downside is in the 112.00/111.90 area. Having been wrong about a continuation of the bull trend from 114.60/114.50, I now believe there is a very strong chance the bull correction will end in the 112.00/111.90 area.
Technical Analyst & Trader
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