The weekly chart of the U.S. dollar index shows the index has been trading in a broad trading band between 79 and 83.5. The index activity has been oscillating around a central support and resistance level near 81.5.
The breakout above 83.5 failed. The trading band has defined the activity of the dollar index starting in March 2012.
The index stays in the upper section of the trading band between May 2012 and September 2012. This showed continuing bullish pressure.
The dollar index then entered a bearish phase trading below the central support and resistance level from September 2012 until February 2013. The dollar index remained in the bullish upper half of the trading band from February 2013 until June.
The move below 81.5 suggests a return to the bearish phase of this oscillation around the central support and resistance level.
This week the index moved above the 81.5 level, but the rise did not take it above the downtrend line A seen on the weekly chart of the index. There is a high probability the dollar index will move into the lower section of the trading band.
The weekly chart has an additional feature which suggests a longer term bullish bias. This is the up sloping trend line B. This line starts with the March 2012 low near 78. The line used the September 2012 low near 78.8 and the February 2013 low near 79 as the anchor points for the up sloping trend line. The current value of the up sloping trend line is near 79.5. This suggests that a fall into the lower section of the trading band will find support near the up sloping trend line B. If this develops then it shows a longer term bullish bias in the dollar index.
If the dollar index continues to trade below downtrend line A then we can expect a period of consolidation between 79.5 and the support resistance level near 81.5.
If the dollar index moves above the value of trend line A and also stays above the value of the support resistance level near 81.5 then the rise is limited because there is strong resistance near 83.5. There is a low probability that the dollar index can breakout above resistance near 83.5. There is also a low probability the dollar index will move below 79.
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 CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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