US Dollar Index Hits Support

07/09/08 08:52:27 AM

by Arthur Hill

After a decline during the last few weeks, the US Dollar Index hit a key support area that represents a big make-or-break level.

Security: $DXY
Position: Hold

Figure 1 shows daily candlesticks with the stochastic oscillator. The index bottomed in mid-March and worked its way higher the last three to four months. Although the advance is not steep, a series of higher highs and higher lows remains in place. After the decline the last few weeks, the index is trading near support from the May–June lows and the March trendline. This support level holds the key to the medium-term uptrend. Failure to hold would reverse this uptrend and have long-term consequences.

FIGURE 1: US DOLLAR INDEX, DAILY. Daily candlesticks are shown here with the stochastic oscillator.

Graphic provided by: TeleChart2007.

The stochastic oscillator has yet to reach oversold levels, but is quickly approaching an area that inspired prior bounces. The green circles show where the stochastic oscillator moved from oversold levels (cross above 20). These crossovers coincided with bounces in the index, and traders should watch this indicator for support as it nears 20. A move above the magenta line would signal an upturn in momentum and a successful support test.

Figure 2 shows weekly prices and the long-term picture. Here we can see the long-term consequences of a support break. With the long-term trend down, the index bounced back to broken support over the last few months. Combined with the trendline extending down from June 2007 (blue), there is considerable resistance around 74.5. A break above this resistance area is needed to consider a long-term trend reversal.

FIGURE 2: US DOLLAR INDEX, WEEKLY. Weekly prices are shown here in the long-term picture. The advance since mid-March looks like a rising flag.

Graphic provided by: TeleChart2007.

On this weekly chart, the advance since mid-March looks like a rising flag, which is a bearish consolidation pattern. A break below support (May low) would confirm this flag and signal a continuation of the long-term downtrend. Needless to say, this would project new lows in the index.

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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US Dollar Index Hits Support

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