US Dollar Index finds temporary support in a bear trend
The US dollar has spent the last three months in a negative trend, but has found support at a long-term Fibonacci level of 93.94, as you can see in the weekly chart of the US Dollar Index below.
Although two weeks ago we spiked as low as 93.63 we did close the week at 94.69, so it was well above the important weekly support level of 93.94. Since then we have traded mostly sideways, unable to reverse the trend off this support level.
Looking at the daily chart I am unable to spot any bullish signals telling me we have a medium-term bottom in place. You can see that the stochastic was severely oversold at the beginning of April, which perhaps helped trigger some short-covering as we approached the important weekly support. Since then, however, the market has range-traded back up to 9520/21 on two occasions in the last two weeks.
When a market range-trades after hitting important support, it’s usually a continuation pattern that just allows the market to consolidate the losses before the next leg lower. It allows oversold conditions to ease and, as you can see in the daily chart below, oversold conditions have indeed eased in the past two weeks.
In the absence of any indication on the daily or weekly charts that the market is about to reverse and head higher, we look to short-term charts. In the four-hour chart below you can see the trendlines extending back over the last two weeks, showing how the Dollar Index is trading within a clearly defined channel.
The markets could spend an extended period of time trading within this channel, but when it does finally break I would favour a move to the downside. This looks like a bear flag formation which means that the negative trend which started at the beginning of December looks likely to continue at this stage.
We have an important resistance level around 95.40/95.50 and it is only a break and daily close, preferably a weekly close, above here that would convince me that bulls have a chance to regain control of this market, signalling that a medium-term bottom has been found around the longer-term 23.6% Fibonacci support at 93.94.
However, bulls may only be able to push us as far as the upper trendline of the four-month bear channel you can see in the daily chart above. If this were to be achieved within the first week of May, the trendline at around the 96.10/96.20 area is going to be a much more important resistance point. If you take another look at the daily chart above, you’ll also notice that the blue 100-day moving average line looks ready to cross below the red 200-day moving average line, which is often seen as a longer-term sell signal.
Technical Analyst & Trader
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