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Dollar to trade sideways, taper or no taper: charts

Tuesday, 26 Nov 2013 | 1:03 AM ET
Chung Sung-Jun - Getty Images

Tapering remains a key topic of debate among investors as year-end approaches and Janet Yellen prepares to take over as Federal Reserve chairman when Ben Bernanke's term expires at the end of January.

While opinions over when the Fed will taper differ, charts suggest that any near-term taper or no-taper decision will do little to fundamentally change the trend in the U.S. dollar index.

(Read more: The dollar bulls are back with a bang)

The U.S. dollar Index chart is defined by two features. The first is a combination of three support and resistance levels, which first act as support before reversing their polarity to act as resistance.

The second is the long-term uptrend line; this was broken on the downside in October but the recent rally has given new life to this trend line acting as a support feature.

The dollar index has been trading in a broad sideways band between 0.79 and 0.84 since February 2012. This is a broad sideways pattern with well-defined rally and retreat behavior. The 0.79 level has been tested as a support three times since 2013, while the 0.84 level has been tested as resistance three times since 2012.

The dollar index has oscillated around a central level near 0.815, which is now acting as resistance. Recent activity has been in the lower half of the trading band between 0.79 and 0.815. Current activity is a retracement from the 0.815 resistance level with the potential to retest the uptrend line as a support level.

The second feature in the dollar index chart is the long-term uptrend line, which starts from 0.78 in March 2012. It uses the lows of September 2012 and February 2013 to set the uptrend line's position. Bullish traders should watch for a rebound from this uptrend line currently near 0.80.

(Read more: Federal Reserve agenda hidden in plain sight?)

This long-term uptrend line gives the dollar index a long-term upward bias. Traders should look for a rebound and retest of resistance near 0.815, which if broken has an upside target near 0.84 – the upper edge of the trading band.

In chart terms, the current behavior is more akin to a steer than a bull. It remains constrained by well-established support and resistance features and shows little evidence of a sustainable change in trend.

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