US dollar loses almost all last year’s second-half gains
US dollar bulls have had a nightmare year. In May 2016 the dollar started a very strong rally. After an initial spike down on Trump’s unexpected election win the US Dollar Index rocketed from a low of 95.89 to a peak on the second trading day of this year at 103.82. As you can see in the daily chart below, by the second day of February we had given up all the strong gains from the December low.
A clear negative head-and-shoulders top reversal pattern had formed by the spring of 2017. By the middle of May it was clear this pattern had been confirmed with a measured target at around 96.70. The blue 100-day moving average had been doing a remarkably good job as support and resistance. We broke below this line in March then bounced back in April and rejected it.
At the start of May we hovered around the red 200-day moving average before breaking below the green 500-day moving average. We held below this moving average through to the middle of June, and then began the next leg lower. The break of the lower trendline in the triangle pattern was further negative confirmation.
Not only have we reached our measured target for the head-and-shoulders top, but we have also retraced exactly 78.6% of the rally from May 16, holding that Fibonacci level of 94.66. This is a crushing defeat for bulls expecting higher US interest rates to maintain a strong dollar.
The weekly chart gives bulls no reason for optimism. I see no reason why we cannot test the 2016 August low at 94.08.
However, for a true picture we have to go further back and look at the monthly chart to find important support levels.
The only trendline of any major importance goes back to the beginning of 2011 and is located around 93.30/93.20. This is just above the June 2016 low. The 200-week moving average at 92.20 will be a lot closer to 93.00 by the time we reach it. There is also an important 23.6% Fibonacci support at 92.90. This will be clearer in the yearly chart below.
This is without doubt the most major support over the next couple of months. I can see no reason why it will not be tested, other than the fact that we are already oversold. The 2016 low at 91.92 was set in May. The 38.2% Fibonacci support level from the 2011 to 2017 rally is at 91.93. Therefore, a long trade in the 93.30/92.90 area would need a stop a little below the 91.90 support.
Obviously a break below this support will act as a sell signal indicating the next leg lower has started.
It’s always important to look at the longer term. The yearly chart above clearly shows how the US dollar has been in a very long-term bear trend ever since the peak in the mid-1980s.
You will notice how the recovery from 2011 to 2017 was really just a bounce in this bear trend. In fact it was a weak bounce because we didn’t even make it as far as the 38.2% Fibonacci target of 106.62.
President Trump wants the dollar lower to help US exports. Clearly, decades of history are on his side.
Technical Analyst & Trader
For more information, trading education and offers visit Intertrader
The content of this article is the personal opinion of the author and not Intertrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.