Monthly Chart Indicates Pause in Uptrend

For the month of August 2018, the dollar index made a shooting star pattern (see Fig 1). The shooting star is a bearish reversal pattern that occurs after a rally. The index has been rising since making a low of 88.15 on February 16, 2018. So even though the rally has not been going on for long it is approaching the 24-month simple moving average, which may act as a resistance, and ay induce a retracement..

In October 2014, the index broke above a symmetrical triangle that was in effect since March 2008. The height of the triangle is approximately 18.7 points and the breakout was near 86.00. The 100% extension target is near 104.7 and the index reached a high of 103.8 in January 2017.

The index also seems to be making a broadening pattern since March 2015. The top made in March 2015 at 100.78 coincided with market’s the second ‘taper tantrum’ due to the imminent Federal Reserve’s rate hike. The RSI, MACD and Stochastic also made multi-year highs. The index then declined, which was stopped in August 2015 near 92.50, which was a previous resistance level. The index rose and tested the March high by reaching 100.60 following the Fed’s rate hike in December 2015. The decline from that level was again reversed near 91.88, the previous resistance turned support level, in May 2016.

The index rallied from till January 2017 and reached a high of 103.815, which also coincided with the 61.8% Fibonacci retracement f the decline from a July 2001 high of 121.29 to a April 2008 low of 71.05. This was also near a congestion / high level made in August 1998. Even though the index made a higher high the technical indicators – the RSI, Stochastics and MACD – did not, and hence formed bearish divergences. The volume was lower too. The confluence of these – strong resistance levels with bearish divergence in lower volume – resulted in the index breaking the support levels and decline to 88.15 by February 2018, when the Stochastics made a bullish divergence.

The price action since March 2015, is also emerging as a broadening formation, which is a bearish pattern. This pattern will complete if and when the index breaks below the February 2018 low before breaking above the January 2017. Till either of those events occur, there is a higher probability of sideways movement on the monthly timeframe and since the trend before the broadening pattern was up the bias up.

Another sign for caution is that the uptrend line on RSI from low in March 2008 was broken in early 2017 and the RSI is still below the downtrend line from the March 2015 high.

Weekly Chart Indicates Potential Congestion Area With Up Bias

The dollar index’s weekly chart also supports some of the inferences from monthly chart but it also shows an up bias. On weekly timeframe, the index broke above a downtrend line from the high of January 2017 during the week of April 30, 2018. However, it is facing a resistance at 89-week SMA, which also coincides with a congestion zone that occurred from February 2015 to October 2015 and then again from February 2016 to November 2016 (see Fig. 2).

The index broke above a symmetrical triangle, that was forming since early June 20010, during the week of September 2014. The 100 % extension target was near 99.25 and the 161.8% extension target is near 109.25. The index reached the 123.6% extension target near 103.50 during the week of December 2016 and then retraced the 50% for the rally from the low of 72.86 reached in the May 2011. This also coincided with the 61.8% Fibonacci retracement level from the low of the May 2014, which was a break out from a congestion zone that started in from January 2012. This level is also near the highs reached in November 2008, March 2009 and June 2010, which are acting as support. This makes the support zone near the lows reached in February 2018, from which the current rally started a strong support.

For the week ending on August 31, the index made a hammer or dragonfly pattern with very small upper shadow and real body and a very large lower shadow. A break above the candle’s high of 95.23 will prolong the rally from the lows of 88.15 reached during the week of February 12, 2018. On the other hand, a break below its low of 94.34 will take it to the support level near 93.10.

Daily Chart Indicates Continuation of Congestion

Dollar Index made a high on 96.865 on August 15, 2018 within a previous congestion zone mention in the weekly chart analysis. Since then it has retraced back to another congestion zone, which lasted from May 9 to August 7 2018 and resembled a handle of a cup-with-handle pattern. The cup was formed October 27 2018 high to February 16 low to May 29 high (see Fig. 3).

The candlestick line made on August 15 was a doji, which with the next few days’ price-action resulted in an evening star. The %K also made a bearish divergence. Following these bearish indicator reading, the index fell to 94.34 by August 28. The bounce since then is facing a resistance at a previous high. The bias still remains to the down side with a potential support at 94.34 followed by next support at 93.19.

The Key Levels

There are many factors that are making the dollar index rise including strong U.S. economy, Fed tightening and weakness in emerging market. The technical chart of the index are reflecting that up pressure, however, the charts are also indicating short-term pause or retracement. The key support zones are  levels between 94.34 and 93.19. The key resistance level is near 96.86.

 

 

Since the beginning of May 2016, the U.S. Dollar Index has been on an uptrend and making bullish chart pa. It got a fresh boost in November with renewed conviction in an imminent Fed Fund rate increase. Also, fueling the rise is a greater possibility of fiscal stimulus, which would expand the U.S. economy. However, former has more real impact than later.

Rising Fed Fund rate has a direct relationship with stronger dollar. Stimulus has greater probability of adding to deficits and stronger dollar would worsen the balance of payment. Both of these forces weaken the dollar.

Dollar Index In Long Term Down Trend

The U.S. dollar has been in a long term down trend. In May 1985, the Real Trade Weighted U.S. dollar index reached a maximum of 128.437. This resulted in the Plaza Accord between the governments of France, West Germany, Japan, the U.S.A. and the U.K. The result was a sharp decline in the index which lasted till July 1995. The index then rose till April 2002, which coincided with a decrease in federal deficit (red line in the Chart 1), which was leading the dollar index.

The index declined, mostly, from 2002 till June 2011, with a brief rise from April 2008 to March 2009. The federal deficits were increase (falling below zero in the chart) during this time. The federal deficits started to improve after 2009 and since 2011, the index has been rising (Chart 1 is up to October 2016).

One of the reasons for this rise is the increasing odds for a Fed-Fund Rate hike in FOMC’s December 14 meeting. On November 4, the probability of  Fed raising the benchmark rate by 25 basis point was 71.5%. On November 18, the probability had increased to 95.4 (Fig. A).

During this time, the dollar index (DX #F), which tracks Fed’s index very closely, rose from a November 4 close of 97.088 to November 18 high of 101.535, 4.58%, which is significant in currency trading.

Triangle Pattern

On monthly chart (Chart 2), the index fell from a high of 128.18 in 1985, to a low of 78.43 in September 1992. The subsequent rise, from April 1995 to July 2001, took the index to 76.8% Fibonacci retracement level of the decline of 80s and ’90s.

From 2001 to April 2008, the index declined, reaching new lows. The bounce from that low found a resistance at 38.2% Fibonacci level in March 2009. From that time till October 2014, the index formed a symmetric triangle. One touch point of the triangle was the low of 72.86 in May 2011, which was very near the low of 71.05, in April 2008.

Dollar index broke above the triangle in October 2014. The approximate height of the triangle is 15.50 points. The approximate breakout point is 86.00. this gives us a target near 101.50.

In March 2015, the index made a high of 100.785, which is very close to our triangle breakout target.

Horizontal Trading Zone

The dollar index has been trading within a rectangle box since January 2015 (Chart 3). The upper limit is bounded by 100.785 to 100.600. The lower limit is bounded by 92.52 and 91.88. The height of this chart pattern is between 8.905 and 8.08.

With a fresh up leg starting from November lows, the index is attempting to break above the pattern. If the break out is successful, odds favor it, then the target would be near 108.68 and 109.69.

Flag – Scary

On monthly chart, (Chart 2), the rectangle box is following a rally from 72.860, the low of 2011 to 100.785, the high of 2015. This is formation is a flag, which usually occurs in the middle of a move, either up or down. If this plays out according to text-book then the target is near 119.805. A move like that will upset many apple-carts around the world.

However, it also has built-in mechanism to keep the upheaval to a minimum. Stronger U.S. dollar will enable more imports into the U.S.A., which will worsen it balance of payment.

The Trade Balance has led the U.S. dollar quite closely since 1992. Worsening balance of payment (BoP) usually leads to weaker dollar and strengthening BoP to stronger dollar.