March 30, 2010: The dollar index has finally broken out of consolidation and is moving up to the next resistance area. A rising dollar is bearish for stocks, precious metals and commodities.
Capturetrends had predicted the rally in the dollar in November 2009 and also the current consolidation period in February 2010. Please click the links below to see the articles:
Caution warranted for spot dollar bears
A look at the charts reveals two technical patterns that indicate the dollar index will reach the upper 83 area. Let us look at the chart (please click link below) to understand the trend of the index.
The area of congestion is marked by the blue square boxes on the chart. The box on the left is where the index had consolidated in June-July 2009. When prices reached the same area in February 2010 it consolidated again and broke out of it last Friday. A consolidation in a trending market is usually a continuation pattern and hence the index should continue to rally.
So far can the index rally? There are two technical patterns that approximately reach the same target. First lets look at the inverse head and shoulders pattern. It shows a measured move of 3.71 points in pink vertical lines. The pink arrows show the head and shoulders and upwardly sloping pink line shows the neckline.
Traditional technical analysis states that if prices break the neckline of a inverse head and shoulders pattern, it will make the measured move. The measured move is the distance from the head to the neckline, which is then applied to the point where prices break above the neckline. The chart below shows that the index should reach 83.97 based on the measured move.
The second pattern is the Elliot wave. In a typical bull wave there will be three waves up and two corrective waves down in between the up waves. The waves are shown by white lines. The third wave is longest wave and you’ll notice that price rallied higher than 4.20 points before correcting. Notice that the projected fifth wave also goes to the area where the measured move of the inverse head and shoulders ends.
The targets of Elliot wave and inverse head and shoulders pattern are also resistance areas. Resistance areas usually act as magnets for price and can also be points of reversal. The resistance areas are shown by red horizontal lines at 83.16 and 83.97 as well as the blue ellipses. If the index breaks out of the 83.97 area, it can rally all the way up to next resistance area of 86.07 to 86.84 shows by the red horizontal lines and the blue ellipse.
Chart analysis
