The US Dollar Index (USDX) has been very choppy for the last 2 months. Two weeks of sharp declines drove the index from 88 to below 80 between December 4 and December 18.
This period covered the year-end general correction on global markets: stocks rebounded, the US Dollar fell back and commodities soared. It was actually only a short-term retracement after a tough second half of 2008 that damaged many investors.
Typically, short-term retracement and correction phases end on technical key points. That’s exactly what happened here with the USD Index. The price action corrected in December to the 61.8% level (point C on the chart) following the 4-month rally from mid-July and mid-November (points A and B).
From the low of December (at 78.775), the index has rebounded by almost 10% to reach 86.2 last Friday. As explained in our last update (Money Morning of November 26), we use a system based on a multi-dimension oscillator to anticipate the price action, the Chande Momentum Oscillator (CMO).
Used to detect overbought and oversold conditions, but also trendiness, divergences, pattern recognitions and chart formations, the CMO often also acts as support and resistance levels.
As a general rule, overbought levels are quantified at +50 and the oversold levels at -50. The level of -50 has been a support level in December when the low has been posted by the USD Index (blue ellipse on the CMO chart).
Look now what happened last Friday (last update of this chart)…
The level of +50 has been a resistance level. Indeed, during one week, the USD Index moved sideways in a tight range between roughly 86 and 87, losing therefore its bullish momentum (point D). That’s why the CMO did not rise further and started to curve downward after a peak at +50.
Yesterday, the price action confirmed this anticipation as the index plunged to 84.4, falling by more than 1.5%.
What are the near-term perspectives then?
The Fibonacci ratios plotted on the chart will probably act as intermediary supports. The MACD and the 30-day technical Momentum indicator are still bullish and well oriented, far from obvious overbought levels. That’s why the USD Index is likely to move higher during the coming weeks. The first target is at 90 (point B) where taking-profits and trend reversal traders may take this opportunity to create a double-top pattern and send back the index lower.