US Dollar Index: Pause Then…..

• Posted by Greg Harmon
• on October 26th, 2010

You would have to be dead to have missed decimation of the US Dollar Index, ($USDX or $DX_F in the futures). Since June it has lost over 13%.  This 5 month sell off has been steady and orderly.  But recently there has been a pause, daresay, a reversal in that action.  Will it stick?  Will it move higher?  Is there more downside to come?  The charts paint a somewhat mixed picture.  Take a look at the weekly chart of the US Dollar Index below.

The Case for a Reversal

Consolidation can be seen in the last 3 candles, beginning with the the long legged doji. This candlestick signals indecision and you can see from the following 2 candlesticks that it is still undecided. If it decides to rise there appears to be a natural resistance area between 79.50 and 80 near the 200 week Simple Moving Average. This is also where there has been some consolidation the Spring, between February and April, and the Summer of 2009 during the period from June through August before that.  Above 80 there is a clustering of SMA’s between 80.90 and 81.37 that might create a further pause.  But above 81.37 the US Dollar Index sees resistance at 83 and then starts looking for the 88.41 -88.50 area.  The Relative Strength Index (RSI) is skipping off of 30 so a move higher is not out of the question.

The Case for More Downside

The US Dollar Index is currently in a bear flag after dropping from the 83 area down to 77 over the last 2 months.  Given the initial move of 6 points before the flag you should expect a similar move down to 71 after it drops out of the flag.  There are also two larger chart patterns working out that make a strong case for more downside after this pause in the US Dollar Index.  The first one is a Head and Shoulders top.  This pattern has the thin left shoulder peaking in March, the head topping at 88.41 in June and the right shoulder peaking in August.  The neckline is drawn at 80.08 making for a target of 71.75 for a downside move to achieve the pattern potential.  But note what else happens if that level is hit.  At that point a broader ‘M’ pattern from the 71.50 low in 2008 to the double tops near 88.50 will complete. This adds further significance to the 71.50 area.

So which one will it be?  I have made my bet, which way will you be positioned?

(As always you can see individual charts and more on my twitter feed and on chartly.)

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