In my previous commentary on the U.S. dollar index published in May, I mentioned that the index, which surged in mere weeks then, was primed for a collapse due to the parabolic nature of its uptrend.
The prediction appears to be coming true as the index has fallen rapidly towards 82.
The parabolic trend is an unusual chart pattern. It captures a spurt of enthusiasm and it also does an excellent job of defining the end of the trend with an exact date. When the parabolic trend line is drawn the end of the parabolic curve becomes vertical. This provides fixed reference point or date. Every day a new price candle is added to the chart, slowly moving towards the fixed end date for the parabolic trend. When the price activity reaches the date there is a high probability the parabolic trend will end because the next price candle will move to the right of the parabolic trend line.
The next most important behavioral feature of this parabolic chart pattern is the rapid collapse when the parabolic trend ends.
Parabolic trend collapses often retrace 60% to 80% of the original parabolic trend rise. The support level near 79 was the beginning of the parabolic trend and the peak was near 89. A 60% retracement from 89 has a target near 83 and this has been achieved. A 70% retracement of the value of the parabolic trend rise has a target near 82.
A retreat to 79 is a 100% retracement of the parabolic trend and this is unusual. While 79-82 is a long term consolidation band, there is higher probability the US Dollar index will use the upper edge of the consolidation band at 82 as the support level.
While the parabolic trend does not provide clues to the development of the next trend or chart pattern, the broader behavior of the index confirms that currency market volatility will not ease any time soon. Trend changes of 20% or more over 3-4 months have become common and there is no indication this behavior will change.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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