Technicians talk about consolidations and breakouts, patterns and ratios. It seems like they make it up. But quite often there is reason and truth in the art of technical analysis. One example is in the US dollar Index.
Everyone knows that the US dollar has been flying higher. If you follow company fundamentals then you watch this for a clue as to the impact to earnings from overseas. Macro traders look at the dollar strength and search for how it will impact other markets like currencies for example. Technicians just follow the price action for its own potential benefit or to look for relative strength.
What gets lost in technical analysis sometimes is what happens after the breakout. And the US dollar Index gives a good example of what to look for. In December the dollar moved higher into a tightening consolidation zone known as a symmetrical triangle. With 94.50 as a mid point the breaks higher and lower continued to be smaller until in late February it moved hard to the upside. The technical picture then created two targets, 97.50 from the triangle break, and 100.50 as continuation of the first leg higher in a Measured Move.
You can see the long red arrow higher measuring the leg to 100.50. And about midway an short consolidation with the small red candle at 97.50. What has happened since then is a pullback though. And this may be the most interesting part of the price action. Last week that pullback did two important things. The first is it touched the 100 day SMA. This has not happened since the rally began in July. And it acts as a kind of recharging of the batteries. As it did so the RSI also hit the technically oversold level.
The second is that the Index returned to the scene of the last break out. It pulled back to the middle of the symmetrical triangle. This often acts as support, and is doing so thus far. A slight bounce Friday and then follow through Monday suggest that the US dollar may be ready for another ascent. At the very least it gives a very good reward to risk trade using a stop at the mid point of the prior triangle.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.