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The US dollar index is testing an important level — the abyss may be next

  • The U.S. dollar index has reached a crucial support level at 0.93
  • A two-year rally and retreat trading behavior pattern appears to be holding for now
  • But if the index does not hold at 0.93, the next solid support is seen at 0.83
Matt Cardy | Getty Images

The dollar has reached the long-term support level near 0.93 identified on the U.S. dollar index chart several weeks ago. That is a critical support level. Below this support level lies the abyss with the next solid support near 0.83.

However, the weekly chart puts the dollar behavior into a wider context. 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.

If support holds near 0.93 then traders will watch for a rebound rally and a retest of resistance near 0.97. That behavior will signal a continuation of the trading band behavior. Failure of support near 0.93 plunges the global economy into an unwelcome and unwanted currency war.

The dominant feature on the weekly dollar index chart was the broad trading band between 0.93 and 1.005.

The move toward 1.005 earlier this year was very important because it was a breakout from a prolonged 22-month sideways trading pattern. But the failure of the move above 1.005 was the first indication that President Donald Trump faced headwinds on delivering on his economic agenda.

The midpoint of the band is around 0.97 and the value of the dollar has oscillated around the midpoint near 0.97. The result is rally and retreat behavior that does not test the support and resistance levels. When the support level has been tested there has been a low probability of a downside breakout.

The dollar index chart developed a weak head-and-shoulder reversal pattern.

That set a downside target near 0.95, which was easily achieved. That is the first level where traders expected a consolidation and a rebound pattern to develop.

It did not develop and that suggests an increasing degree of weakness in the dollar trend behavior. It suggests the constraining features of long-term support and resistance levels are not as strong as they have been since 2014. That, in turn, suggests there is an increasing probability the current test of support near 0.93 will not be successful.

Political instability in the U.S. means the dollar could potentially dip below the lower edge of the trading band near 0.93. The weekly chart shows there is no strong support or consolidation areas between 0.93 and 0.87.

That suggests that any sustained move below the support area near 0.93 can quickly fall to 0.85.

We use the ANTSYSS trade method to extract good returns from those potentially fast movements.

Sustained weakness in the U.S. dollar index also impacts other major currencies with a strong continuation of current trends in the Australian dollar, euro and yen. Traders and investors are watching for evidence of a rebound, or a support collapse, before taking new long-term positions.

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.