The weekly dollar index chart shows several interesting patterns. These set up the trigger points for a breakout to new dollar strength, or a breakdown for new dollar weakness. On balance, the bias is towards renewed dollar strength.
The first key feature on the chart are the support and resistance levels. Combined, these provide a very broad trading band. The support level is near $0.93 that was tested multiple times in 2015. The dollar index has dipped below this briefly, but usually rebounded quickly from this support level.
The resistance level is near $100.005 This level was tested twice in 2015. It's not a well-tested level, so it leaves open the potential for the dollar to strengthen considerably.
The second key feature is the down-sloping trend channel. For most of 2016, the index has moved between these sloping support and resistance lines. It has been a pattern of rally and retreat. The current rally faces trend line resistance near $0.96.
The feature of particular interest is the way that any future retreat in the dollar index will first encounter support near $0.9 rather than finding support on the lower trend line. This constrains and compresses the behavior of the index and adds a new level of volatility to the next potential move. It's like a compressed spring. The compression activity between the down-sloping trend line and the support level can develop into a rapid and powerful breakout.
A breakout on the upsides above the value of the trend line has resistance near $100.005. Traders should prepare for a fast move on any breakout. We use the ANTSSYS trade and analysis method to identify the opportunities as the breakout rally develops. This is traded with a tight stop using a customized ATR indicator.
A breakout on the downside also has the potential to move quickly with an initial downside target near $0.89.
It's too early to know which direction the dollar index will break. A breakout on the downside also has the potential to move quickly with an initial downside target near $0.89.
Currently traders are ready to go short as the index reacts away from the downtrend line with a move to retest support near $0.93.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available from www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.
