After a rush to $1.04 the dollar index has developed a retreat and a series of tests of support near $0.99. The current narrative points to the defeat of President Trump's effort to repeal and replace Obamacare, but that narrative often misses the point. The bill was not defeated by Democrats. It was defeated by the far-right Republicans who believed the bill did not go far enough.
Rather than diminishing Trump's authority it gives him a green light to bring back an even stronger repeal bill that is more consistent with his campaign policy statements.
And that's bullish for the dollar index. When the market enthusiastically welcomed Trump's election it did so, in part, because the market believed he would implement his policies. That lifted the dollar to $1.04. A ramping up of Trump campaign policies in legislative action will again act as a bullish factor on the dollar index. The dollar index charts put this activity into context.
The weekly chart provides the context for the support and resistance features. 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 2015 January. The move above $1.0005 was very important because it is a breakout from this prolonged 22 month sideways trading pattern.
The subsequent failure of this support level showed short term weakness, but not trend weakness. It's the second dominant feature on the dollar index chart that explains why.
The dollar index chart has a well-established up trend line. It starts from the low near $0.92 in 2016 May. The position of the trend line is confirmed with rebound activity in 2016 August to October, and again in November. This shows consistent bullish pressure.
The current value of the trend line is near $0.99. The current value of recent temporary support for the dollar index is also near $0.99. This combination of two support features suggests that the dollar index will find strong support near $0.99 and use this as a rebound rally point for a continuation of the long term uptrend.
These same support and resistance features are used to set both short term and long term dollar index targets. The first target is the long term resistance near $1.005. The next resistance level is near $1.04 where the dollar index paused in the initial Trump propelled breakout. The longer term target is near $1.08 and is calculated using classic trade band analysis.
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 $1.08 level provided a consolidation support level in 2001 and 2002.
The uptrend rally did not continue as strongly as we thought, however the uptrend remains well established.
Traders prepare for a rally rebound and uptrend continuation. We use the ANTSSYS trade and analysis method to identify the opportunities as the rally rebound develops from the trend line.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
For more insight from CNBC contributors, follow @CNBCopinion