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US dollar index to repeat rally-retreat: Charts

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Expectations that the Federal Reserve will raise interest rates in early 2015 coupled with growth headwinds in Europe have pushed the U.S. dollar index higher, but charts suggest that upside is limited.

The monthly U.S. dollar index chart puts the recent rally into a broader context.

From November 2011 to August 2014 the U.S. dollar index traded in a sideways consolidation band between $0.79 and $0.84. The width of this band is projected above long-term resistance near $0.84 to give an upside target near $0.89. There is a strong probability that the current rally will reach this target.

The $0.89 target acted as strong resistance in 2008, 2009 and 2010. In December 2008, the market retreated from $0.89 to support near $0.79. This was repeated in March 2009 and again in June 2010.

Consistent behavior near $0.89 suggests there's a high probability the dollar index will retreat rapidly from this rally target.

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However, there's is an important difference this time around: good support near $0.84.

The $0.84 level was tested as resistance in July 2012 and again between May and July 2013. This suggests that any retreat from $0.89 will find support near $0.84, thus there's a lower probability that the dollar index will retreat and retest support near $0.815.

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Resistance near $0.89 is well-established. From March to August 2004 and from July 2005 to March 2006, it acted as support. This suggests that if the dollar index breaks above resistance near $0.89 there's a strong probability that any further rise will be limited. The next technical target is $0.94, which was a support level in 1997, 1998 and 2003.

The short-term outlook for the dollar index is a rally continuation towards $0.89 followed by a retreat and retest of support near $0.84. This is a good long-side trade using ANTSSYS trading signals. Then traders will look for a consolidation in the trading band between $0.84 and $0.89.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.