Will dollar strength continue? It's a question most effectively answered with chart analysis of the dollar Index.
Chart patterns take time to develop. A pattern that spans a significant amount of time may develop sub-patterns which can provide an early guide to calculated price move targets. The dollar index is a case in point.
Starting January 2015 the dollar index developed an equilateral or symmetrical triangle. The breakout above the upper edge of the triangle gave an upside target near $1.035. This breakout failed and the dollar retreated. It's the nature of the retreat that develops a longer term chart pattern.
This is the cup and handle pattern and its best seen on a weekly chart . This pattern consists of two components. The first component is the cup. The pattern starts from the high in January 2015 and is completed with a matching high in November 2015. This forms the lip of the cup.
The 2015 price activity is defined using the lows. These lows are captured in a semi-circular support pattern. This is the body of the cup. The depth of the cup is measured and this value is used to project a price target.
The second component of this pattern is the handle. This develops when the price activity moves beyond the right side of the cup. It's a pullback that is best defined with two parallel lines. The handle on the dollar index chart is clear, but it's not a well-defined downward sloping price action. However, the behavior is consistent with the cup and handle chart pattern.
The significant feature is the price breakout above the upper trend line that forms the handle. The value of the depth of the cup pattern is projected upwards from the point of the breakout above the handle. This gives an upside target near $1.05.
This is higher than the target calculated from the systematical triangle pattern. These two chart patterns suggest that the dollar index's first target is $1.035 followed by a move towards $1.05. The length of these patterns provides some clues as to when these targets may be achieved.
The cup and handle pattern took almost one year to develop. This suggests that the $1.05 target may also take 9 to 12 months to achieve. These are long term patterns and they develop over extended periods. These are strategic chart patterns that help define the environment for shorter term trades. The cup and handle pattern confirms a high probability of continuing dollar strength and that has much broader implications for other currency pairs.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.
