Debt ceiling? The dollar doesn’t care
The United States is bickering about the debt ceiling once again but the market is bored with the debate and that boredom is reflected in the charts.
The solution to the debt ceiling debate is always the same – give us more free money from the Federal Reserve and increase the limit on the national credit card. This is not a crisis; it's a long-running mini-series with a predictable ending. The market has seen this show before; market boredom with the debate is evident in the U.S. dollar Index chart.
The U.S. dollar index measures the value of the U.S. dollar relative to a basket of currencies. The basket is composed of the euro, Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona. It is used as a measure of strength or weakness in the U.S. dollar.
The U.S. dollar index chart is defined by two features. The first feature is a series of three support and resistance levels. The second feature is the long-term uptrend line.
The U.S. dollar index has been trading in a broad sideways band between 0.79 and 0.84 since February, 2012. The 0.79 level has been tested as a support level three times since 2013, while 0.84 has been tested as resistance three times since 2012. The most recent resistance tests saw a temporary breakout above 0.84, which suggests a slight bullish bias to the activity in the dollar index.
The U.S. dollar index has oscillated around a central support/resistance level near 0.815. The current activity is in the lower half of the trading band, which puts short-term bearish pressure on the dollar index.
The second feature on the U.S. dollar index chart is the long-term uptrend line. This starts from 0.78 in March 2012 and uses the lows of September 2012 and February 2013 to set the uptrend line's position. There is a higher probability that current weakness in the U.S. dollar index will rebound from this uptrend line currently near 0.80.
(Read more: Here's what could stall the rise in dollar/yen)
This long-term uptrend line gives the U.S. dollar index a long-term upward bias. Traders should look for a rebound and retest of resistance near 0.815. Once the U.S. debt ceiling debate ends, the index will have a higher probability of moving towards the upper edge of the trading band near 0.84.
The real danger is that something different will happen in the current episode of this long-running mini-series. Perhaps the United States will take the same austerity medicine it has been urging on the rest of the world. The pattern of chart behavior suggests this is a low probability outcome in this latest installment budget bickering.
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.