The Brexit and Janet Yellen's indecision on rates have been digested by the market. Now, the prospect of either a Donald Trump or Hillary Clinton victory in the U.S. election isn't seeming to induce any jitters in the dollar index.
The Brexit has proved more difficult and complex than imagined when Brits went to the polls, and the dramatic drop in the pound was evidence that the market was beginning to understand the consequences of the referendum decision. However, the drop in the pound was not matched by a dramatic rise in the dollar index.
It is inevitable that U.S. interest rates will rise but the timing remains a subject of speculation. But apart from some small, short-term gyrations, there is no substantial impact from Yellen's statements. The real surprise will be when decisiveness overrides indecision but the dollar index chart suggests this is not a high probability in the near future.
As a result, the dollar index will continue to trade within a well-defined trading band. The first key feature on the weekly chart is the support and resistance levels. The support level is near $0.93 and was tested multiple times in 2015 and most recently in May 2016, dipping below but quickly rebounding. This has been a defining support feature since late 2014.
The resistance level is near $1.05, a level that was tested twice in 2015. There is a high probability that this level will again act as a resistance cap on the current rally. But there is also a resistance feature near $1.00 and this is a psychological barrier. A breakout above $1.05 has the potential for the dollar to strengthen considerably.
The dollar index makes sharp and fast move between the support and resistance levels in the trading band. The current rally above $0.96 has continued for three weeks, with strong bullish sentiment and fast moves. This momentum will carry the dollar index to near $1.00 in the near term.
But the trading band limits the potential reaction to a Trump or Clinton victory. A bullish result has a cap near $1.00, while a bearish reaction would see the dollar quickly retreat towards the consolidation area around $0.96 or fall further to retest support near $0.93.
Traders should prepare for fast move on any breakout. We use the ANTSSYS trade and analysis method to identify the opportunities as the breakout rally develops above the downtrend line. This is traded with a tight stop using a customised ATR indicator.
Currently traders are long as the rally continues but they will tighten stops and be ready to go short as the index reacts away from the resistance level, with a move to retest consolidation support near $0.96.
Daryl Guppy is a trader and the author of The 36 Strategies of the Chinese for Financial Traders, available at guppytraders.com. He is a regular guest on CNBC's Squawk Box and a speaker at trading conferences in Asia, Australia and Europe
