The Dollar Rally Could Accelerate: Chart

Investors have been piling into Treasurys in recent weeks, boosting the dollar. In a sale on July 9, the U.S. Treasury sold three-month bonds at minus 0.005 percent, and six-month bonds at minus 0.006 percent. The Treasury says it's the first time they have registered negative yields. This takes place in the context of a temporary pause in the Euro-zone problems.

The U.S. dollar index chart suggests a rapid increase in the strength of the greenback.

The dollar index is a basket of currencies. They are the euro, Japanese yen, Great Britain pounds, Canadian dollar, Swiss franc and Swedish krona. The dollar index is used as a measure of the strength or weakness of the greenback. The chart below is dominated by several features and they are best seen on the weekly chart.

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The most important feature is the uptrend line. This starts from 73.5 low in 2011, September. The uptrend line uses the lows of 75 in October 2011 and 78.5 in May 2012 as the anchor points. The uptrend line defines a steady strengthening of the U.S. dollar starting from 2011 September.

The second feature on the chart is the consolidation band between 79.5 and 81.5. The dollar index has shown consolidation behavior around this band between December 2011 and 2012 May. The breakout above 81.5 in May was followed by a successful retest of 81.5 as a support level in June. This is bullish behavior and confirms the continuation of the uptrend.

This combination of support near 81.5 and the value of the uptrend line support near 80.5 suggest there is a low probability the dollar uptrend will be broken. Any retreat in the dollar index has a high probability of developing a rebound from these support features.

The behavior of the U.S. dollar index between 74 and 81.5 is determined by a number of support and resistance features. The behavior of the U.S. dollar index above 81.5 is different because the next strong historical resistance level is near 89. This means the dollar can rapidly rise from near 81.5 to a high of 89. A strong dollar index is bearish for gold and it also leads to increased calls for appreciation in the Renminbi.

In May 2010 the dollar index’s rise above 81.5 developed a fast moving parabolic trend. The index rose from 81.5 to 88.8 in six weeks. The key feature of this type of trend is the very rapid collapse of the uptrend. The dollar index touched this high point and then the uptrend collapsed very quickly, falling back to 81.5 in nine weeks.

The dollar index has developed a potentially powerful breakout above 81.5 with an upside target near 89. This has a high probability of developing into a fast rally followed by a very fast retreat over the next three months.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – 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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