The U.S. dollar index is not listening to the talk coming out of the U.S. mid-term elections. The greenback has continued to trend lower, now hovering at eight-month lows, despite Washington's threat to introduce a bill to pressure Beiing to revalue the yuan, in a bid to appease voters.
The charts indicate that the dollar will continue to struggle in the months ahead. The collapse from the parabolic trend which started in June 2010 was defined with a downtrend line. An attempt to rally above this line was quickly followed by a retreat, where a second trend line has been used to define the new downtrend.
The recent test of the upper edge of the consolidation band near $0.815 has failed, with a developing probability the dollar index will develop a double bottom rebound from support near $0.80 which is the low of the previous downtrend. The focus is on the development of a consolidation pattern with a breakout above the downtrend line signaling a new uptrend.
A fall below the critical support level near $0.79 has an immediate downside target near $0.77 with support near $0.76.
Some analysts have identified a head and shoulder reversal pattern in this chart. They point to the left shoulder developing in March 2010 and the current rally and retreat activity forming the right shoulder. The head and shoulder pattern does appear on the dollar index chart but it has no analytical significance.
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 CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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