The weakness in the U.S. dollar index is no surprise from a chart perspective. The index chart is dominated by several features and they are best seen on the weekly chart.
The first feature is the symmetrical triangle. This is a pattern of indecision. The market was waiting for a new development, in this case progress on the resolution of Greek and Euro zone debt. When price breaks out of this pattern the breakout is often very rapid as developed with this fast rally.
The depth of the symmetrical triangle is measured and used to calculate the potential upside target. This is located at 79.50. This is also the lower edge of a long-term support and resistance level. A move above this level has the next resistance level near 81.50. This creates a narrow consolidation band.
Investors taking the road to safety had little choice but to transfer funds into U.S. dollars, and U.S. treasuries. Terrified of an imploding and disintegrating Euro, investors had few markets liquid and deep enough to absorb large scale transactions. This fueled the rally breakout.
The price breakout from 74.50 very rapidly reached the first target near 79.50 and then lost momentum. The breakouts from symmetrical triangle are not trend continuation patterns. They are typically rallies so traders go short when the first projection targets are achieved.
The U.S. dollar index is dominated by fast rallies and retreats between well-established support and resistance levels. This suggests that the current weakness in the U.S. dollar index has support near 74.50. This is just above the midpoint of the previous symmetrical triangle pattern.
The depth of this pattern suggests there is a reasonable probability the U.S. dollar index will fall below 74.50 and retest the lower edge of the base of the symmetrical triangle pattern near 72.50. Traders will look for a consolidation pattern to develop between 72.50 and 74.50.
Weakness in the U.S. dollar will put upwards pressure on other currencies, such as the Yen , the Australian Dollar and the Korean Won .
A weakening of the U.S. dollar index has bullish implications for gold with the potential for a rebound from the 2011 uptrend line and a steady trend rise above $1,680/ounce to retest $1,780.
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.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com.
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