The U.S. dollar index has developed support near 97. However this support level is weak so investors should prepare for more downside activity.
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.
The dollar index chart has been dominated by a very broad sideways trading band that started in 2015 March. The upper level of the band is resistance near 100. The lower edge of the band is support near 93.
The dominant feature on the weekly dollar Index chart was the broad gap between 93 and 100.5. This trading band has dominated dollar index behavior since 2015 January. The move above 100.5 was very important because its a breakout from this prolonged 22 month sideways trading pattern. The mid-point of the band is around 97.
When the index moved above 100 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 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 95. This is the first level where traders will watch for a consolidation and rebound pattern to develop. This level is above support near 93 but a rebound from 95 is consistent with the way the dollar index oscillates around the central midpoint of 97.
The dollar index is now a more volatile market with less sustainable trend development. Traders need to be prepared for this oscillation behavior where the value rallies and falls, but does not test the upper or lower edges of the trading band.
This is the current environment with a tight oscillation around 97.
The overall trend is down so there is an increased probability that the dollar will test support near 95. The political instability in the U.S. means the dollar index could potentially dip as low as the lower edge of the trading band near 93.
We use the ANTSYSS trade method to extract good returns from these movements.
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.
