US Dollar Index to bottom out?
In my last article on the US Dollar Index, about two weeks ago, I suggested there had been a break lower at the beginning of May. In the second week of May, we had broken back up above the nine-month trendline and 200-day moving average. I have to admit this completely confused me.
Having been short on the break lower, I was frustrated to wait two weeks before the market fooled me with a pull-back above the 200-day moving average. Then, unfortunately, the collapse followed once I had exited my position.
The index has collapsed since that time over the past two weeks. We moved below the 500-day moving average at 97.55, to reach a low as I write at 96.797. We hit this low yesterday (Monday) and today we have a low so far at 96.809.
This means we are hovering just above Fibonacci support at 96.50/40, taking a low from May 2016. We are of course oversold at this stage after a steep drop but remain in a five-and-a-half-month bear trend.
While bears should be careful running the shorts any further, and may want to think about taking at least some profit on their positions, this alone would not be enough evidence for bulls to be looking for a significant bottoming. For this we’ll have to examine the weekly chart to see if there’s any further, more important support.
A longer-term view
In the weekly chart below, we are clearly testing a two-year trendline from May 2014. This is almost exactly where we are trading at now at 96.90/96.80.
Perhaps even more important, if you look to the bottom-left of the weekly chart, you’ll see the Fibonacci projections from a whopping six years ago. That’s the May 2011 low at 72.696, stretching to the high in the first week of January this year at 103.82. I often write about how important it is to watch the longer-term charts, even for a day trader. Here’s a great example of why you should.
The first 23.6% Fibonacci support is at 96.475. This means that so far we have bottomed only about 30 pips above here. It is remarkable how that ties in exactly with the one-year, 61.8% Fibonacci support at 96.465. You’ll also note that slow stochastic on both the daily and weekly charts is clearly in oversold territory.
The index is clearly in a very strong bull trend. A six-year bull trend in fact, which started in May 2011. My general rule of buying at an important support level in a bull trend, when the market is oversold, certainly applies here.
The FOMC minutes are released tomorrow. This could be the perfect trigger for a resumption of the bull trend if traders and investors remember the Fed’s commitment to higher rates this year. Perhaps the focus will shift from the weakness we have seen in reaction to recent pressure on the White House administration and back to the economic fundamentals.
Technical Analyst & Trader
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