Op-Ed: Dollar weakness unexpectedly established on the charts

We had high hopes for the dollar and we were wrong. We expected support near $0.99 to hold. Instead it has failed so our next task is to use the Dollar Index chart to set the potential downside targets.

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One important point about the relationship between analysis and trading. We use chart analysis to identify high probability support and resistance levels.

We use chart analysis to identify points where there is a higher probability of a shift in the balance of probability that leads to a trend change.

But high probability does not mean infallibility so every trading analysis includes the condition which signals that the analysis is incorrect. This is the stop loss.

The fall below $0.99 was the condition that told us the previous analysis was incorrect.

The Dollar Index chart has been dominated by a very broad sideways trading band that started in March 2015. The upper level of the band is resistance near $1.00. The lower edge of the band is support near $0.93.

We noted the dominant feature on the weekly Dollar Index chart was the broad between $0.93 and $1.005. This trading band has dominated Dollar Index behavior since 2015 January. The move above $1.005 was very important because its a breakout from this prolonged 22 month sideways trading pattern. The mid-point of the band is around $0.97.

When price moved above $1.00 there was a good probability the price would continue to trend upwards. This did not happen.

Normally price moves in rallies and retreats between the upper and lower edge of the trading band. With the Dollar Index, the price has oscillated around the midpoint near $0.97. The result is rally and retreat behavior that does not test the support and resistance levels.

The Dollar index chart shows a weak head and shoulder reversal pattern. Its weak because the left shoulder is a consolidation rather than a clear change in trend. The right shoulder is well defined with a clear change in short term trend.

However, we can apply, with caution, a head and shoulder projection analysis to the dollar Index. This sets a downside target near $0.95.

This is the first level where traders will watch for a consolidation and rebound pattern to develop. This level is above support near $0.93 but a rebound from $0.95 is consistent with the way the Dollar Index oscillates around the central midpoint of $0.97.

The Dollar Index is now a more volatile market with less sustainable trend development. It's a traders market.

Traders prepare this oscillation behavior where the value rallies and falls, but does not test the upper or lower edges of the trading band. We use the ANTSSYS trade and analysis method to identify the opportunities as these oscillations develop.

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.