A Bullish Flag For The US Dollar Index

01/20/06 08:14:47 AM

by Arthur Hill

The US Dollar Index has declined the last few weeks, but the pattern looks similar to that seen in July-August 2005, and support is at hand.

Security: $DXY
Position: N/A

The trend over the last 12 months is clearly up as the US Dollar Index has risen from the low 80s to the low 90s (Figure 1). Until there is a clear trend reversal, declines should be viewed as corrections that run counter to the larger trend. The July-August decline was a correction that traced out a falling flag and the move above 89 signaled a continuation higher. The decline over the last eight to 10 weeks also looks like a falling flag (magenta trendlines). These are bullish consolidations that are confirmed with an uptrend breakout. The index would need to exceed its December high to break flag resistance and signal a continuation higher.

FIGURE 1: US DOLLAR INDEX. The trend over the past 12 months is clearly up, so until there is a clear trend reversal, declines should be viewed as corrections that run counter to the larger trend.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

In addition to a potentially bullish pattern, the index is trading near support from its 40-week simple moving average (SMA). A 40-week SMA is equivalent to a 200-day SMA (40 x 5 = 200). This moving average acted as resistance in April (green arrow) and then support in early September. The index is once again testing moving average support by forming a doji in early January. Failure to hold moving average support would be bearish and negate the falling flag.

I am also seeing support from a key momentum oscillator. The relative momentum index (RMI) is derived from the relative strength index (RSI) and oscillators above/below 50. This level acts as a bullish/bearish threshold as well as support or resistance. Note how 50 acted as support in September. The indicator is once again trading near 50, and this is the make-or-break point. Failure to hold here would be bearish, but a move back above 50 would be bullish for momentum.

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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