Dollar Breaks Range Resistance

06/09/06 07:50:35 AM

by Arthur Hill

After firming the last few weeks, the US Dollar Index broke range resistance, which argues for higher prices in the coming weeks.

Security: $DXY
Position: Accumulate

The US Dollar Index began its fall in March, swooned in April, and continued lower in May. The index lost more than 7% in less than three months and became oversold. Note how the relative strength index (RSI) moved below 30 on April 27 and remained oversold until May 17 (about three weeks). This initial oversold reading occurred midway through the decline. This is a great example of how a security can become oversold and remain oversold.

FIGURE 1: US DOLLAR INDEX. The index began to head down about mid-spring, not firming until mid-May (see gray oval).

Graphic provided by: MetaStock.

The US Dollar Index did not firm until a bullish engulfing pattern formed in mid-May (Figure 1, gray oval). After that, the index formed a trading range over the next few weeks. I overlaid Bollinger Bands to show that volatility contracted as the range extended. The narrowing of these bands served as an alert that a breakout was near. However, Bollinger Bands do not offer a directional clue. For that, we must rely on other indicators or simply wait for the breakout.

FIGURE 2: US DOLLAR INDEX. The gray box shows a consolidation in late March and early April.

Graphic provided by: MetaStock.

The surge above resistance broke the trading range and turned the short-term trend bullish. Now we must look at the chart and establish an upside target. There was a consolidation in late March and early April (Figure 2, gray box). The support break as seen here turned into resistance around 89. In addition, the 200-day moving average was around 89, and I will make this the upside target. As far as assessing strength goes, a strong index should hold its breakout and a move below 85 would be cause for concern.

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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