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CHANNEL LINES


Bullish Or Bearish Pattern For The U.S. Dollar Index?

02/27/04 09:29:15 AM
by Kevin Hopson

The U.S. Dollar Index has temporarily bottomed out but is the recent action indicative of a move higher?

Security:   $USD
Position:   N/A

I have touched on the U.S. Dollar Index ($USD) several times in the past few months. In my initial analysis, I predicted a forthcoming bottom in the index, as bullish divergences on the chart indicated the likelihood of a short-term price reversal. However, once this occurred, I was skeptical whether the index could move significantly higher, the reason being that substantial resistance levels needed to be taken out. Unfortunately, not much has happened since then, making the short-term outlook just as uncertain as before.

There are some key price levels that you can watch in the near-term to get a better grasp on where the index might be headed. Looking at an 18-month chart for the index, you will notice that prices have been stuck in a trading range between $85.00 and $88.00 since the beginning of the year. Since trading ranges tend to be continuation patterns and the long-term trend is negative, you would expect an eventual break to the downside. This does not always occur though, as trading ranges sometimes act as topping or bottoming patterns after an extended move in one direction.

Graphic provided by: Stockcharts.com.
 
As a result, it will be important to watch the $88.00 level. If the index can break its top channel line - as well as the 38.2 percent retracement level ($88.22) from the Nov. '03 to Feb. '04 decline - prices could see a significant break to the upside. On the other hand, a substantial breach of support around the $85.00 level will likely lead to further weakness. Keep in mind that even if the index is able to break to the upside from its current trading range, the longer-term technicals would not turn bullish until the $92.00 level is taken out. This is the site of the top black parallel line, the index's 200-day moving average and the 50 percent retracement level ($92.03) from the Aug. '03 to Feb. '04 decline.



Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.

Glen Allen, VA
E-mail address: hopson_1@yahoo.com

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