The U.S. Federal Open Market Committee (FOMC) meeting this week will drive the U.S. dollar movements. The direction of the movement is not yet clear in the chart analysis. The potential limits for the reactions are more clearly defined.
This highlights some important issues regrading the use of charts in analysis. They are first and foremost a tool for identifying the balance of probability of one reaction over another. Sometimes the balance is clearly tipped in one direction. This is shown with clear chart reversal patterns such as a head and shoulder, a rounding top, or the break below a key support level or trend line.
There are no well-established chart patterns on the U.S. Dollar Index, however there are well defined support and resistance levels.
The index is a basket of currencies comprising the euro, yen, British pound, Canadian dollar, Swiss Franc and Swedish Krona. The index is used as a measure of the strength or weakness of the U.S. dollar.
The second use of chart analysis is to identify trip points where a market moves into a new phase. This may be a trend line. A close below the trend line signals the end of the uptrend and the beginning of a new downtrend. With the dollar index these trip points are set by the historical support and resistance levels. A move above or below these levels confirms a significant change in the trending behavior. Traders use this as a signal to take new positions.
The key resistance level is near 81.5. The support level is less well defined, but is located in a narrow band between 79 and 79.5. These levels define the sideways trading band that has contained dollar index movements since September 2012. One of the features of this trading band activity is the use of the width of the trading band to set breakout targets. This is a measured move calculation.
A downside breakout below 79 has a target near 77. Is this reasonable? This level has acted as a minor support level in the past. It is not particularly strong. The strongest support level is near 74.5. This suggests a fall below 79 will find temporary support near 77 and long term support near 74.5.
An upside breakout has a target near 83.5. These calculations are a measured move based on the width of the trading band. Is this upside projection reasonable?
The upside projection is slightly conservative because it does not match any previous resistance level. The historical resistance level is slightly higher near 84. Additionally this is also the value of the uptrend line that started in September 2011. This combination of historical resistance and trend line resistance suggests that any breakout above 81.5 has a target near 84.
In the current situation the dollar index chart does not provide a high probability analysis favoring a breakout or a retreat. However, the chart does identify the points and the behavior, which quickly confirm for traders both the direction and the targets.
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.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests..
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