The weekly chart of the dollar index shows a long term head and shoulder reversal pattern. This is a long term pattern that developed over 12 months. The left shoulder developed in 2012 January. The head developed in 2012 July. The right shoulder developed in 2012 November. The neckline of the pattern connects the 2012 March low and the 2012 September low. The value of the neckline is currently near support near $0.795.
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The head and shoulder pattern is invalidated by a sustained rally and move above $0.815. The upper point of the right shoulder is also a well-established resistance level. The right shoulder pattern could continue for several weeks as part of a sideways consolidation movement between $0.795 and $0.815. This extended sideways movement does not invalidate the head and shoulder pattern.
The head and shoulder pattern is confirmed with a sustained move below support near $0.795. This level provided both support and resistance in 2011 and 2012. A fall below this level has a downside target near $0.745. This target is calculated by measuring the distance between the neckline of the head and shoulder pattern and the top of the pattern.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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