Can The US Dollar Rally Last?

08/17/10 09:08:53 AM

by Donald W. Pendergast, Jr.

The US dollar tends to trend reliably across time frames, but is this new daily chart rally just a minor retracement of an emerging downtrend or is the bull run that began in December 2009 starting to reassert itself?

Security: DX, UUP
Position: N/A

The US Dollar Index (DX) has taken quite a tumble since making an enduring swing high in June 2010, but powerful support levels (made during the recent February–March 2010 consolidation) near $80 appear to have had a major effect with the DX reversing sharply higher over the last six trading sessions. But can the rally last? That's the big question.

FIGURE 1: USDX, DAILY. Volume is coming on strong on this bullish reversal off of key support at $80.17; US dollar bulls would do well to note the heavy resistance zone that runs from $84.69 to $85.76.

Graphic provided by: TradeStation.

Graphic provided by: Barry Taylor ProAm Paint Bars and Better Momentum.

Figure 1 is the daily chart for DX; using the TradeStation paint bar feature, I've plotted the Barry Taylor ProAm paint bar study. The blue bars represent professional (smart money) activity; when they occur near major support levels, they are a very reliable indication that an emerging reversal and/or trend may have some room left to run. Conversely, when the blue bars manifest at significant resistance levels, a pullback or selloff may be approaching. Like any single technical tool, for best results they need to be used in conjunction with other noncorrelated indicators, but they seem to work very nicely all by themselves as long as you can identify the key support/resistance (S/R) levels on a given chart. The fact that the most recent blue ProAm (short for "professional/amateur") bar had such wide range lends extra credibility to the bullish reversal.

The yellow price bars represent amateur (dumb money) price action; typically, the amateur bars will appear near failed breakout patterns at key S/R areas. In other words, they're attempting to latch on to a bullish move higher at a major resistance area (not a good idea most days) or trying to sell a bearish breakdown at a major support level (also a poor idea, at least most of the time).

Also plotted on the chart are the Barry Taylor Better Sine Wave SR studies -- red for support levels and white for key resistance levels. Now, you need to always keep track of which way prices are approaching these S/R levels to keep the price action in perspective; you'll note that the most recent pullback support level (red dots labeled "PB") failed as the downtrend gathered steam.

That in itself (an S/R failure) is extremely valuable information, since now you know that there is a high probability that prices will continue to fall to the next significant support level. You can see the same dynamic at work on the previous uptrend, as prices powered right on through the resistance zone (white dots) near $83.25 in May 2010. Once the resistance area was penetrated, the DX just kept on chugging higher.

With that brief tutorial of these two indicators out of the way, let's see if we can't anticipate where the DX might meet up with heavy-duty resistance in the days and weeks to come.

At the bottom of the chart, the Barry Taylor better momentum indicator shows us that volume is exceptionally strong coming off the support at $80.17, and wise technicians will respect this information. Overhead, there is the originally violated pullback support level at $85.35 and two major Fibonacci resistances (50% and 62%) at $84.69 and $85.76, respectively. Any of these could act as major resistance, and the fact that they're all within a 1.07 range makes it a very formidable resistance block indeed.

One way to play this emerging rally is to look for a strong pullback on a 30-minute intraday chart to a key support level (floor trader pivots, trend lines, the 50- or 200- period exponential moving average [EMA], and so on) hoping to grab a handle or two on a continuation move higher toward that previously mentioned resistance area.

Since the dollar index frequently moves inversely to the price of gold, you might also want to monitor the daily price of gold to see if there are any clear divergences between these two markets. The opportunities are sure to appear, especially for traders who are already using a proven system to exploit the setups that are inevitable.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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