The dollar index rapidly rose to nearly $1.04 following President Donald Trump's confirmation.
It has fallen steadily since and is now re-testing the $1.005 support level. This rally, retreat and retest activity is often followed by a rebound rally. The potential for a rebound has increased in the run-up to the presidential inauguration day and the immediate policy announcements which will follow.
The weekly chart provides better guidance to the support and resistance features on the dollar Index chart. The dominant feature on the weekly dollar index chart is the broad trading band between $0.93 and $1.005.
This trading band has dominated dollar index behavior since January 2015. Support near $0.93 has been tested four times. resistance near $1.005 has been directly tested twice. Lower level resistance near $1.00 has been tested five times. The move above $1.0005 was very important because it's a breakout from this prolonged 22-month sideways trading pattern.
The breakout moved to near $1.04 and is retesting the $1.005 level as a support level. A successful retest of support confirms the strength of the breakout. Failure of the support level will see the dollar test the next support level. This support level is created by the uptrend line starting from the low near $0.92 in May 2016. The current value of this support trend line is near $0.975.
Classic trading band chart pattern analysis measures the width of the trading band. This value is projected upwards from the $1.005 resistance level. This gives an upside target near $1.08. The first rally reached halfway to this target before retreating.
The target is verified against the behaviour of the dollar index on the monthly chart. The $1.08 level provided a consolidation support level in January 2001 and again in 2002 between June and October. There is a reasonable probability that the $1.08 level will again provide a consolidation resistance point for a rally rebound from support neat $1.005.
This rise is a move of $0.07 so we look at the time frame for similar moves in recent times to give some guidance for how quickly the dollar index may move towards the $1.08 target. The rise from $0.93 to $1.00 starting in January 2015 took 9 weeks. The rise from $0.85 to $0.93 starting in October 2014 took 13 weeks.
This suggests that the index could rise from $1.005 to $1.08 in around 11 weeks after the initial breakout. This is also around January 20 when Donald Trump will formally step into the oval office.
Traders should prepare for a fast move breakout rally rebound and uptrend continuation. We use the ANTSSYS trade and analysis method to identify the opportunities as the breakout rally develops above the resistance level. This is traded with a tight stop using a customised ATR indicator.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia. He runs training, analysis and resource workshops for retail and professional financial market traders involved in stocks, CFDs, warrants, derivatives, futures and commodities in China, Malaysia, Singapore and Australia. He has his own trading company, guppytraders.com.