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Dollar index hits a major long-term target

The dollar looks like it is about to complete its seventh consecutive month of gains. In fact nine months ago in May 2014 we bottomed out at 78.91, then saw a dip back in June before embarking on that seven-month rally which has taken us to 95.48. According to my calculator that is a gain of 16.57 points or 20.99%. More importantly, over the last four years we have recovered almost exactly 50% of the losses that were seen from the very beginning of 2002 up until the low in March 2008. During this time, the dollar index fell from 120.51 down to 70.70, a loss of 49.81 points.
The monthly chart below clearly shows these price movements.
You can see from the Fibonacci dotted black lines how we have come to within a whisker of the 50% retracement target at 95.60. It’s worth noting how once we broke above the 200-month moving average and 38.2% Fibonacci level, in the 8970/8980 area, the index rocketed to that next longer-term target at 95.60 in just three weeks.
So what next? 95.50/95.60 should act as strong resistance with this index now severely overbought on the monthly, weekly and daily charts. Whilst I am not expecting an all-out collapse just yet, we have seen some profit-taking already down to good support at 93.65. Having bounced off here we remain in the strong bull trend and cannot rule out a retest of strong resistance at 95.50/95.60. If this holds on the next test, we would have a small double top pattern with a break below 9365/9360 likely to trigger further losses down to 9250/9245. I would expect this to hold the downside and it should be worth trying a long position here, looking for a resumption of the bull trend, but our longs will need a stop below 92.15.
It’s quite possible that we could just bounce around between the mid-93 area up to the mid-95 area for the next few weeks, which would allow the daily overbought conditions to unwind. This is very common in a bull market. You do not get a big correction to the downside, but you can spend many weeks going sideways as the market pauses for breath before a breakout to the upside and a continuation of the strong bull trend. In fact we saw this occur for seven weeks throughout November and the first half of December 2014. If this pattern is to be repeated we may have to wait until the beginning of March for the next break higher. On a fundamental level, with the global economic outlook becoming more uncertain, it may make sense for the market to pause until the picture becomes clearer. A weaker outlook for the rest of the world or continued strength in the US economy should be enough to ensure the dollar continues its four-year bull trend.
We have already recovered levels not seen since 2003 and a break above 9560 could see the index push on to test autumn 2003 highs at 99.37/99.49.

Jason Sen – Technical analyst and trader

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