Fooled by a false break in the US Dollar Index
The US Dollar Index topped in the first week of January this year, after a strong rally from May 2016. This was in fact the second leg higher in a bull market that started in May 2014.
Since January we experienced a correction from a peak of 103.82. As you can see in the daily chart below, we formed a triangle pattern from the start of December 2016, but hit more important one-year trendline support at the end of April.
The red 200-day moving average had been tracing almost exactly the same path as this trendline since early November. This interesting correlation therefore added to the significance of the support level.
If I zoom in on the triangle pattern in the daily chart below we can see that the trendline and 200-day moving average were broken in the last week of April. Just as significant was the break of the 38.2% Fibonacci support at 99.27 and also the March low at 98.85.
Despite the oversold stochastic conditions, price action was warning of further losses. However, the index just hovered below these areas with no big sell orders to push prices lower. At least until 4 May, when the index tried a break above the previous week’s high at 99.33, reaching 99.46.
Just as it seemed bulls could seize back control with a push higher through the important resistance at 99.25/35, sell orders hit the market. The index then collapsed back below the previous day’s low of 98.89. (See the red bearish engulfing candle on 4 May above.)
Surely this signalled the next leg lower had begun. Wrong! We bottomed at 98.55 with bears caught out as prices shot higher to 99.68 yesterday. This was enough of a recovery to fill the gap from the third week of April at 99.65.
As I write you can see in the chart above that prices are still holding the one-year trendline, 38.2% Fibonacci and 200-day moving average support at 99.35/99.25. The oversold stochastic has exploded higher in a bullish signal.
The long-term view
We have to look at longer-term charts to discover why the index bottomed when it did. The weekly chart below shows how prices bottomed exactly at the three-year trendline support.
So the dollar has in fact maintained the three-year bull trend perfectly. This is precisely why you have to keep an eye on the longer-term charts.
In the short term now, bulls need to hold prices above last week’s high at 99.46. We should first target yesterday’s high at 99.69, then the first Fibonacci 23.6% resistance at 99.78. I expect a struggle here as we become overbought in the short term. However, we should eventually break higher, targeting 100.01/03 and then the most important resistance for the recovery at 100.55/100.70.
This is the second 38.2% Fibonacci and four-and-a-half-month bear trendline. Therefore it is key to future direction. Holding here keeps bears in control of the four-and-a-half-month correction. A break higher, however, would confirm bulls as fully back in control and act as a more important longer-term buy signal.
Technical Analyst & Trader
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