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Is A Breakout For The US Dollar Index In The Cards?

02/12/09 12:29:01 PM
by Chaitali Mohile

The US Dollar Index is consolidating after an extensive advance rally.

Security:   $USD
Position:   N/A

The US Dollar Index ($USD) has entered a sideways consolidation after a robust bullish rally. Figure 1 shows a bullish flag & pennant continuation pattern that breaks upward. But the stability of the breakout must be questioned in the current economic crisis. The relative strength index (RSI) (14) has established a support at the 50 levels, indicating bullish strength. However, the average directional movement index (ADX) (14) has declined from the comfort zone that indicated a coming downtrend. This means the index is stronger only because the US economy is doing better compared to that of Europe and Japan. In such a scenario, anticipating a successful breakout for the $USD would be incorrect. The previous high resistance at $88.46 may resist the future breakout rally.

FIGURE 1: $USD, DAILY. The index is consolidating, forming a bullish flag & pennant continuation pattern.
Graphic provided by:
Below are the daily charts of the Euro Index ($XEU) (Figure 2) and the Japanese Yen Index ($XJY) (Figure 3). $XEU in Figure 2 is highly volatile compared to the yen index. $XJY had a robust bullish rally for a longer period. Currently, $XJY in Figure 3 is consolidating at a higher level. Comparing Figures 1, 2, and 3, $USD and $XJY are better performers than $XEU. But the dollar index seems stronger than the other two.

Graphic provided by:
Graphic provided by:
Due to the weak trend indicated by the ADX (14), the dollar index is likely to remain range-bound in the near future as well. If the flag & pennant pattern breaks upward, then the rally would hit the resistance at $88.46. The trendline from the bottom shows the support at $83. So if the pattern breaks down, $83 would be the strong support. In addition, the 50-day moving average (MA) is the immediate support at $84.

FIGURE 4: $USD, MONTHLY. The index has moved sideways after a prolonged bullish rally.
Graphic provided by:
Figure 4 would give us a long-term view for $USD. ADX (14) shows a significant downtrend since 2003. The index consolidated at a new low below $72 in 2008 and entered an intermediate uptrend. Therefore, $USD surged from $72.50 and formed a lower high at $87.50 level. Currently, $USD is consolidating near the newly formed support of the 50-day MA. But the intermediate uptrend is declining, so the index may not break out. The RSI (14) in Figure 2 ranged between 50 and 70, indicating bullish strength during consolidation. Thus, $USD is likely to continue to consolidate.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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Date: 02/12/09Rank: 4Comment: 

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