The summer was a great time for US dollar bulls
In the second week of May the US Dollar Index bottomed out at 78.90 and pushed higher to the 100-week moving average (blue line) at 81.00 into July. A pull back from this resistance area saw a test of the 10-month trend line (yellow) and from here we raced higher from the beginning of July. See the weekly chart below.
A run of three big points took prices from 79.74 to 82.72 this week. As you can see in this weekly chart we hit the longer term 61.8% Fibonacci resistance at 82.50/55, spiking just a little higher to test September 2013 highs at 82.67 before topping out. So what does all this mean going forward into early autumn? Let’s try to figure out if the rally can continue higher.
After such a strong rally it is unsurprising that we are now overbought on the weekly chart and having hit important resistance around this 82.55/65 area I think the most likely scenario is a bout of profit-taking before any further gains. We are very close to the end of the week and the end of the month so Friday’s close will have added significance. If on Friday night we were to see a close below 82.45/35 this could signal further weakness into September. However this is only seen as a correction in a bull trend at this stage and offers buying opportunities down to 81.85/80. There is even a good chance that this area will mark the low for September but I would suggest that any longs here would be wise to watch for a break below 81.65 as this could add further pressure and extend the bull market correction as far as 81.25/15. This could be the last chance to buy into the dollar before a rally through to the end of the year.
However if we can end August with a close above the 82.55/65 area this should be a very positive signal heading into autumn and we could hit our first target of 82.95/00 within the first two weeks of September. Once through here it seems likely we will push on to important four-year trend line resistance in the 83.35/50 area. I would be wary of a high for 2014 here.
Gold bulls have been paralysed by dollar strength over the summer which seems to have counteracted any geopolitical concerns with the outbreak of violence in the Middle East and the Ukraine.
Oil however has been hit quite hard and dollar strength may well have played a part in seeing the October WTI Crude futures contract fall heavily from 105.55 to 92.50, a loss of $13 a barrel in just eight weeks.
The 92.50 area just happens to be important longer-term 61.8% Fibonacci support for the October contract, as you can see in the chart above, which is easily measured if you take the 2013 low of 84.51 up to the 2014 high of 105.55. This support therefore is working perfectly as prices became oversold this month and perhaps some short-term weakness in the US dollar will also help a short-term recovery in the price of oil, but I would like to see a weekly/monthly close tomorrow night at least above the 200-week moving average at 9380 for bulls to feel more confident in their long positions going forward into September.
Clearly the 92.50 area is critically important this autumn and bulls will have to watch the (yellow) 17-month trend line you see in the chart above. A break below would suggest that the summer weakness could extend into the autumn and at least test February lows at 90.55. Below here I would be concerned about a test of 2014 lows for the WTI Crude October contract at 88.70/55.