US Dollar Index bounces right off important support
I have been focusing a lot on the US Dollar Index in recent months. I last wrote about it three weeks ago, so it’s time for an update. On 20 July I wrote:
‘The only trendline of any major importance goes back to the beginning of 2011 and is located around 93.30/93.20. This is just above the June 2016 low. The 200-week moving average at 92.20 will be a lot closer to 93.00 by the time we reach it. There is also an important 23.6% Fibonacci support at 92.90.
‘This is without doubt the most major support over the next couple of months. I can see no reason why it will not be tested, other than the fact that we are already oversold. The 2016 low at 91.92 was set in May. The 38.2% Fibonacci support level from the 2011 to 2017 rally is at 91.93. Therefore, a long trade in the 93.30/92.90 area would need a stop a little below the 91.90 support.’
The yearly chart below shows price action going back over 30 years to 1985, where the index peaked. The Fibonacci lines from this peak down to the low in 2008 gave us a 23.6% Fibonacci level of 92.90/88. I used that as my second important target and support level for this year’s sell-off.
As you can now see on the monthly chart, we hit this Fibonacci and bottomed not far below.
The low in fact was 92.55 and, if you look at the weekly chart below, this is only about 20 pips above the 200-week moving average support at 92.35. We also need to note the first positive candle seen in the weekly chart since early June. At that time, the index perfectly held the short-term 23.6% Fibonacci support at 96.48/47.
Although the index did not recover a great deal, the positive candle did signal respect for the support level. Accordingly we held above that Fibonacci level for four weeks.
Last week’s positive candle on the weekly chart is likely at least to signal the same respect of the next target and support. Therefore in oversold conditions we should at least trade sideways. Don’t forget, however, we are in a six-year bull trend and at this stage one can strongly argue that this year’s declines are only a correction in that trend.
Of course we will not see a straight-line recovery. Markets have to trade back and forth as bulls and bears battle it out. In fact a re-test of the high-92 area is always likely. We will watch to see if a double bottom forms around 92.60/92.50 for further bullish confirmation.
If we can move above last week’s high of 93.77 we should target the first short-term 23.6% Fibonacci target of 94.28. This where we expect the index to stall. However, if we can eventually push higher, we will target stronger resistance at 95.20/95.35. Here bears should step in, confident that the eight-month downtrend will resume.
It is likely that the market will turn lower initially. It’s a question of whether the bulls can fight back and eventually force a break higher. Above 95.60 signals further strength towards what should be a strong selling opportunity at 96.80/96.90. I expect this resistance to fail on the first test at least, which should send the index back towards the mid-95 area.
Technical Analyst & Trader
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