US dollar developing a short-term bear trend
The US dollar hit the headlines last week when Janet Yellen indicated that the FOMC could raise rates at a less aggressive rate this year. The dollar has sold off quite significantly since then, so I will have a look at prospects in the weeks and months ahead.
In the weekly chart below, we can see how the dollar had a strong rally over an eight-month period from the beginning of July 2014 up until the middle of March 2015. However, despite the interest rate speculation over the last 12 months, the dollar has largely been in a sideways trend after bottoming out at 92.62 in August of last year.
The dollar index recovered strongly over the next three months to re-test the March 2015 high of 100.39, and topped out in December of last year at 100.51. This left a worryingly negative, large double top pattern as you can see in the weekly chart above, and the textbook reaction has been a four-month bear trend since the formation of that double top pattern.
For a closer look we will examine the daily chart covering the last seven-and-a-half months. In this short time period below you can see how the trendline joining the August and October 2015 lows was initially broken in February, but we managed to recover before quite a violent collapse back through that trendline on 10 March.
Not only was this trendline broken, but we dipped back below the 200-day moving average, which is the red line you see in the daily chart above. When the FOMC met last week on 16 March, the index re-tested that red 200-day moving average and topped exactly at the level before plunging for a two-day period. Over Friday and Monday we’ve seen a small recovery but the question is: can this recovery be sustained with the index showing oversold conditions?
The downward-sloping channel indicated by the two trendlines on the right-hand side of the chart clearly highlights the short-term negative trend. The high in January was below the high in December, the low in February was below the low in December, and the peak at the beginning of March was also lower than the peak in January.
Although the index has managed to make it back above the February low of 95.24 as I write, we do run into resistance at the 95.70/95.80 area. I’m not confident we can even make it that far but, if we do continue higher to unwind the oversold conditions on the daily chart, there is a much bigger challenge for bulls around 96.50/96.60. A good chance of a peak therefore, to indicate the negative trend remains intact.
Only a sustained break and close above 9750 would break this short-term negative trend.
Holding below 95.70/95.80 signals that bears remain in control of this market in the short term, at least for a re-test of the March lows so far at 94.58. I don’t see this as a particularly strong level of support, so it would not surprise me to see this broken.
Eventually we should then target the 94.30 area. If we continue lower into the end of March, we should be looking at testing the lower trendline of the downward-sloping channel at around the 93.75/93.65 area. This is just a fraction below the October 2015 low, so failure here should add pressure and perhaps accelerate moves to the downside in this negative trend. We can then target 9320/9310 before the August low at 92.62.
Technical Analyst & Trader
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