Dollars and Diamonds

04/24/03 01:54:21 PM

by Arthur Hill

After a sharp decline over the last 15 months, the US Dollar Index has started to stabilize around 99-100. However, the long-term trend is down and a recent support break suggests a resumption of this downtrend is underway.

Security: US Dollar Index
Position: N/A

The US Dollar Index broke double top support in June 2002 for a major trend reversal (red arrow in Figure 1). The double top projection (9 points) was fulfilled just over a month later with a decline to 103.5 (gray arrow). The index stabilized for a few months and then continued lower with a move below 100. Since reaching 100, the US Dollar Index has once again started to stabilize as a diamond consolidation formed.

Figure 1: Weekly chart for the US Dollar Index.

Diamonds are usually viewed as reversal patterns, but the direction of the next significant move is dependent on the breakout. An upside breakout above 101.5 (upper trendline) would be bullish and a downside break below 99.4 (lower trendline) would be bearish. This diamond formed over the last two and a half months and the recent support break should be considered bearish until proven otherwise.

One interesting caveat is the way diamond tops will break out to the upside, then find resistance at the top of the formation and reverse to the downside (see the diamond top in CTN2). The opposite is true with regard to diamond bottoms- which can break to the downside then find support at the bottom of the formation and reverse to the upside.

Figure 2: Daily chart for the US Dollar Index.

Graphic provided by: MetaStock.

For price projections, the height of the formation (102 - 97.5 = 4.5) should be subtracted from the support break (99.4 - 4.5 = 94.9). A move below 95 implies new reaction lows in the index over the next few weeks. A move back above 100 (lower trendline extension) would question the validity of the support break and further strength above 101.5 would be outright bullish.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Dollars and Diamonds

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