US Dollar Index breaks 2015 high but fails to beat 16-year resistance
As you may have read in my recent article, the US Dollar Index faced important resistance from the early-2015 high at 100.39, the late-2015 high at 100.51, and the trendline projected from these two points at 100.68/67. Obviously these important resistances were broken a couple of weeks ago. The breakout has since been confirmed with the two-week close above these levels.
In fact the trendline at 100.68/67 worked perfectly as support last week. And also this week with a low at 100.64, as I write on Wednesday. So it’s a very bullish picture in the weekly chart above. But we are extremely overbought and have to look at the monthly chart to get the full picture.
Going back to 2002 we have a peak at 120.40. You can see that the index has now retraced up to the 61.8 Fibonacci resistance at 101.42. Having peaked above here by only a fraction, when you consider the monthly chart below, it looks likely we will close the month below this important level. This is not what bulls need to see in an overbought market.
This evidence alone is nowhere near enough for me to be calling a longer-term top for the index. I would need to see several further signals for me to have confidence that the market is about to turn and trend lower. However, it is a big warning and, with the important year-end only one month away, can the index close above 101.42 on 31 December?
This is the key question for dollar bulls at the start of 2017. If you were only looking at weekly and daily charts you would have completely missed this important point. There is a risk that traders could be buying a breakout just before a collapse!
In the very short term there is a negative signal. Not enough for me to be calling a longer-term top in this market just yet. However, this is what I would expect to see in the initial stages of a potential top, so we must take note.
If you look at the four-hour chart we have a potential head-and-shoulders top pattern forming over the past two weeks. I say ‘potential’ because the pattern hasn’t completed and won’t be confirmed until we break below the neckline at 100.60.
Therefore it is not a topping or negative pattern until this level has been broken. This level is all the more significant because, as you can see in the chart below, it is the 23.6% Fibonacci support.
If we do test this important first support area, by the time we get there (perhaps at the end of the week) the 100-period moving average (the blue line) is likely to be pushing up towards this level. This will of course add to the significance of the support.
A break below here is therefore negative only in the very short term. This would target 99.99/95, then the most important support level in the near term at 99.70/99.65. If you look back at the four-hour chart above you can see this is a 38.2% Fibonacci support.
There are some more important reasons to see this as a buying opportunity if we examine the daily chart below.
Taking Fibonacci levels from the low of the year at 91.92 to the high of the year at 102.05, we have the first Fibonacci support at exactly 99.66. This is a perfect confluence of Fibonacci support with the shorter-term levels.
In addition, the red trendline joins the July high with the October high only just above this level at 99.80/99.75. When you consider that we are in a strong bull trend, with no clear signs of a reversal, this is a compelling reason to be buying into the index at this level.
I would only be concerned on a break below the October high at 99.12. This would force me out of a long position and into reconsidering the direction of the market in the near term.
However, if we do bounce from here what happens next will be very interesting. Will we build a longer-term topping pattern on the bounce? This will be crucial. Let’s look again in January.
Technical Analyst & Trader
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