May 16, 2010: The dollar written off by leading economists and experts late last year has rallied and still has some upside left. Technical analysis indicates that the dollar has the potential to rise another 4.5%.
The dollar rallied about 12% from the November 2009 lows based on pure technical factors of supply and demand. A look at the chart of the futures contract on the dollar index gives a clear understanding of the price action and the trend of the currency. The dollar index measures the greenback against a basket of major currencies
A little bit of history first. In November 2009 several experts predicted the demise of the dollar as reserve currency. Unfortunately for them the dollar was reaching an area of demand and poised for a bounce. The 75 area marked on at the bottom of the chart by a white rectangle was a proven demand level for the dollar as prices had rallied from that area in August 2008. When prices hit that area again in November 2008, dollar reversed its downtrend.
Using the simple theory of supply and demand, it’s safe to conclude that the dollar will not reverse the uptrend till a significant area of supply is hit. The chart shows two areas of supply–one in the 88 area and the other in 90/92 area–marked by the white rectangles at the top of the chart. If prices break above the 88 area it can then go the higher area.
Levels of supply and demand often act magnets for prices. But the existence of a supply area is no guarantee that prices will rally to it. Other technical factors have to support trend.
Analysts use several technical indicators to determine trend, but let’s examine three. First, at the very bottom of the chart is the ADX indicator, which shows the strength of a trend. The ADX after falling for quite sometime has started to rise, showing increasing strength in uptrend.
Second, the 30-week moving average shown by the white curling line is used by long term investors to determine the market’s bullish or bearish bias. When the prices are above the moving average and the average is sloping up, like on the dollar, the trend is bullish. Finally the upward sloping straight line is the uptrend line. Till the uptrend line is broken technical analysts believe that prices will continue to rally.
Given these factors a continued rally of the dollar is a high possibility with some bumps along the way.
