Let’s look at the price positions of the US Dollar Index and the Dow Jones Index to gather clues about possible moves next week:
First, the Dollar:
The Dollar Index rallied (strengthened) last week, after forming a tight coil and has broken above its key 20 period moving average. Price is finding preliminary resistance at the falling 50 period average, but an ‘oversold’ bounce was highly likely.
The trend has not changed, which is obvious from the weekly chart, and until proven otherwise, the index remains in a downtrend.
Nevertheless, a stronger dollar should be bearish for commodity prices which could be good for the market.
Speaking of the Market, let’s look at the Dow Jones Index:
I’ve drawn three lines on the chart.
First is the resistance line at 12,800 and support line at 12,200 which also form a parallel trend channel that has bound price virtually throughout all of 2008.
Price is now testing and breaking above the upper trend channel line (this upper line actually goes back further as a horizontal line, and the 12,800 level is quite significant).
The third line I have drawn is a rising trend channel which began in mid-March which has now met the upper resistance channel and formed a sort of ascending triangle from which price is now breaking upwards as well.
IF (and that is a big ‘if’) the triangle pattern is an actual pattern that meets its upside target, price could reach 13,800 based on the distance from the height of the triangle (just over 1,000 points) added to the breakout price. That seems far-fetched to me, but that is the implication of the pattern resolving.
Also, notice that there is potential overhead resistance via the falling 200 period moving average.
A ‘flat-line momentum divergence’ also has developed as price has inched its way higher. As price made newer relative highs, the momentum oscillator did not confirm these new prices but instead made almost equal swing highs, which set up a non-confirmation.
By the way, all the chart analysis we do could be validated (with an upside break) or disconfirmed when the Fed announces monetary policy early next week. In fact, the market could have been increasing over the last few weeks in anticipating of another cut or positive mention from Bernanke.
Check out or Join the Market Club for more analysis, scans, and signals as well as deeper analysis for the upcoming week. I’ll be updating more this week on candidates or commentary from Adam Hewison there.
Be careful next week if you’re a newer trader and don’t understand how the Fed can move markets suddenly.