It appears that the US Dollar Index broke to the downside out of a Bear Flag formation, hinting that lower prices are yet to come (and perhaps higher prices for certain commodities). Let’s take a look at the Daily Dollar Index.
The whole Dollar price structure appears to be forming a larger bearish pattern, with the initial down-thrust to the December lows being the start of a move that was interrupted by a “Dead Cat Bounce” sort of awkward movement up to new highs on a clear negative momentum divergence.
Price now could be breaking downwards out of a Bear Flag that began with the highs above the $89 level. A price projection (measured move) using the conservative upper trendline at $87 would project price to test the $81 level below (the “pole” measured roughly $6).
Ironically, the rising 200 day SMA is at the $82 level which gives a “Magnet Trade” or open air target down to that confluence support level.
If we do get this push down to $82 or less in the Dollar Index, we would expect to see the upward move in Crude Oil continue and might expect a push up in Silver and Gold and some other commodities.
Let’s keep watching this move, and if you so feel inclined to trade it, one way to do so might be shorting UUP which is the PowerShares Bullish Dollar fund, or buying UDN, which is the Dollar Bearish PowerShares fund – though do your research before trading either of these.
Corey Rosenbloom, CMT
Afraid to Trade.com
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