The US dollar index is a trade-weighted index of the dollar itself. It can be traded as a stand-alone instrument, or as a guideline to those instruments that trade opposite to the dollar.
Its current chart has bearish implications for the dollar.
Dollar index: Bearish pattern forming.
Recommendation: Sell short.
Trend: Short-term sideways. Medium-term technically up.
Strategy: Sell the dollar short at current levels.
n The US dollar index has formed a “potential” head and shoulders pattern (as labelled). It needs to close below line 3 (the neckline) to confirm this bearish pattern.
n Its weekly stochastic oscillator (on top) is moving down from an overbought level, which is a bearish set-up.
n Traders sell short the US dollar index at current levels (80.23 points) and cover your shorts (take profits) near line 3, that is, at the 79 level.
n A further close below line 3 – 78.8 points – will be a signal to re-enter short for a larger drop.
n Right now there is a lower target (target 1) to 76.9, which is based on channel 1 to 2. This implies that line 3 support will get broken.
A breakdown below line 3 will then set up a further drop to 73.8 (target 2), which is based on the height of the head and shoulders projected down.
n The current stop loss is a close above 81.45 points.
Colin Abrams is an independent technical analyst. To subscribe to more recommendations by the author, or attend his courses, go to www.themarket.co.za.