Dollar Index Weekly Technical Outlook
FMX | Connect –www.fmxconnect.com - (Reported 3/1/10)
Chart 1: Daily Front Month Dollar Index (long-term analysis):
For the past few weeks, the dollar index has bounced within the bounds of a rising wedge formation (bearish). On Friday, the index briefly pierced the bottom line of the formation and tested its the 20-day moving average. Given the pattern, we believe that the dollar will inevitably break down and trigger a short to medium term selloff.
A wedge pattern is a triangular pattern with both trend lines heading in the same direction. A rising wedge (chart 1) has both trend lines heading upwards, with the bottom line at a steeper slope, while a declining wedge (chart 1) has both trend lines pointing downwards, with the top line at a steeper slope.
Rising wedges are bearish formations, as the pattern describes the uneasiness and anxiousness of buyers. As noted earlier, the bottom line of a rising wedge is at a steeper angle than the top line. This means that buyers are willing to buy at a higher price as time moves forwards. Rising wedges have an 82% chance of a breakout to the downside. (Bulkowski, 2000).
Declining wedges are bullish formations, as the pattern illustrates the uneasiness and anxiousness of sellers in the market. As we mentioned earlier, the top line of a declining wedge is at a steeper slope. This means that sellers are willing to sell at a lower and lower price as time moves forward. Declining wedges have a 92% chance of an upward breakout (Bulkowski, 2000).
Chart 2: Daily Front Month Dollar Index (short-term analysis)
Short-term technicals indicate a bearish condition. On 2/19/10 the dollar index made a higher high, while the stochastic oscillator made a lower low (green lines). In technical parlance, the move is known as a negative divergence – signaling an imminent reversal. The relative strength index is at 64, and confirms the negative divergence. Historically, this level in the RSI has preceded a selloff in the dollar index.
On Friday, the index broke the lower trend line of the rising wedge, tested the 20-day moving average and then closed right on the bottom line. These developments, along with the bearish formation, are cause for great concern.
If the index manages to close below the bottom trend line look for support at the 20-day MA, followed by the 79.60 level. Further support can be found at the 50, and 100-day moving averages.
julian@fmxconnect.com
-----
About FMX: FMX Connect is an information, data, and analytics portal for Commodities. The portal provides an all-in-one package including essential market data, independent third party research, industry news, and commodity trading tools. FMX Connect provides efficient, effective, and thorough data that bridges all aspects of commodities onto one screen. The Result; A user friendly application for hedge fund traders, OTC brokers, individual investors, and industry participants
-----
Note: The information presented, while from sources generally believed to be reliable, is not guaranteed and may not be complete. FMX | Connect makes no representations or warranties regarding the correctness of any opinions or information. Past results are not necessarily indicative of future results. Nothing in this report should be construed as a representation to buy or sell shares, futures or options, which contain considerable risks. For internal client distribution only. Any reproduction, re-transmission, or distribution of this report without permission is prohibited. Media correspondents or reporters may not quote any one