US dollar correction indicated into the end of November
The US Dollar Index has been on a bull run since February of this year. Although we had a very long (and confusing for me) period of consolidation over the summer, the index resumed the bull trend from a low in September just as the autumn was beginning.
The purple 55-day and blue 100-day moving averages have crossed above the green 500-day moving average. This confirms the positive outlook.
If we zoom into the daily chart below we see the market reversed from very minor one-month trendline resistance at around 97.70 this week. It would appear this is nothing to worry about, according to the daily chart, just a normal development in a bull trend. Therefore it should offer a buying opportunity on further weakness.
However, it’s always advisable to have a look at the bigger picture. As you know, I do advise keeping an eye on the weekly and even the monthly chart, even if you are only a day trader. Here’s a great example of why this is necessary.
The weekly view
The weekly chart below shows the steady recovery for the US dollar this year. We stalled at the blue 100-week and red 200-week moving averages throughout the summer – now you know what held us back! But, having broken well above these lines now, the outlook is more positive. Or so you would have thought.
The 61.8% Fibonacci line, highlighted in red dots, offers strong resistance at 97.87. Just below this resistance we hit the upper trendline of the rising wedge (recognised as a negative pattern) at around 97.50-97.60. As you can see in the weekly chart below, it seems the bulls took profits on their long positions exactly at this level. They didn’t wait to see if the Fibonacci level could be tested.
Levels on the weekly chart are usually more important than those on the daily chart so we must pay attention. The longer-term players, who have greater power to move markets and reverse trends, could be exiting the dollar now and moving into short positions.
In the short term we should target minor support at 9680/75. A bounce from here is likely on the first test. We are in a bull trend and there will usually be buyers lining up at support levels. However, further losses target strong short-term support at 96.25/15.
I would use this as a short-term buying opportunity and see how far we can rally. It is not out of the question that we even re-test the 9760-97.70 high. Here we will look for the double-top sell signal. The market will be even more overbought at this stage!
A serious sell signal
A break below 96.00, however, takes the index as far as the most important support of all for the potential correction, at 95.50/40. If this holds, the bull market remains dominant and we can hope for a steady climb back to the recent highs. This therefore is a buying opportunity not to be missed. It’s a very low-risk opportunity, with stops below 95.00 but a potential return of up to 200 pips.
As this is such an important support area, a break below 95.00 is a very serious sell signal. Indeed, this would signal a resumption of the 2017 bear market.
Technical Analyst & Trader
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.