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Technical analysis: Index points to weaker dollar

Colin Abrams

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.

(Weekly)

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.

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