This article was published in Business Times’ column “Chart Point” on 30 October 2017.
DXY daily chart Source: Bloomberg, PSR
Red line = 20-day exponential moving average, Blue line = 60 ema, Green line = 200 ema
The dollar index (DXY) is an index of the United States dollar relative to a basket of foreign currencies, mainly against the Euro, Japanese Yen, Pound Sterling and Canadian Dollar. A rising DXY means the US dollar is appreciating against this basket of currencies.
Since hitting a high of 103.82 in January 2017, the DXY has been trending lower sharply. The descending price action lasted for nine months before a near-term bottom emerged in September. Even though there was a marginal break below the crucial 91.92 support area in September (shown by the highlighted box), buyers hurried back and kept the 91.92 support area valid. The 91.92 support area will be the major pivotal point moving forward as the next wave selling will only begin after sellers break below it.
However, the recent bullish rebound off the 91.92 support area has established a near-term bottom on 8 September. In addition, the bottoming process also produced an inverted Head and Shoulders pattern suggesting further upside. Inverted Head and Shoulders pattern is a bullish price action formation to predict the reversal of the current downtrend.
For the inverted Head and Shoulders pattern to be valid, the neckline needs to be breached. That exact scenario played out recently on 26 October as the DXY broke above the 94.12 neckline forcefully. Thus, we should expect the DXY to begin the next up-leg. Using the projection of the inverted Head and Shoulders pattern implies an upside target of 97.22 by adding the distance between the neckline and trough to the neckline. Furthermore, the 20-day moving average has also crossed above the 60-day moving average on 27 October further justifying for the shift in sentiment to the upside.
Keep in mind that the broader long-term trend for DXY is still down. It is a secular downtrend that only started in January 2017. A secular downtrend tends to run for two years, and we are still in the early phase of this secular downtrend. Hence, in the near term, expect the DXY to retest the 97.22 resistance area with limited upside. After which, we believe the secular downtrend will retake control of price.