The All Important Level to Watch on the US Dollar Index

Sep 24, 2010: 9:18 AM CST

It seems as though the Federal Reserve once again is taking aim squarely at the US Dollar Index with talk of ‘likely’ (or possible) injections of liquidity into the economy in the form of a second major Quantitative Easing plan should the economy falter.

While QE may indeed help stocks and the general economy – should it come to that – the major casualty of a new round of easy monetary policy will likely be the US Dollar – weakened by the injection of liquidity.

That being said, let’s take a quick look at the critically important weekly technical (chart) level to watch in the US Dollar Index, as it reflects confluence support.  Any further breakdown under this support would trigger a major chart sell signal.

Let’s see it on the Weekly Frame:

From a chart perspective, the level to watch is abundantly clear.  It’s roughly the $80.00 index level as seen above.

First, “Round Numbers” often provide their own support or resistance, and serve as a pure price level to watch.

Second, the 200 week Simple Moving Average rests currently at $80.04 – it’s a level that has been important in the past, halting the earlier decline in August.

Finally, the 61.8% Fibonacci Retracement as drawn (from the November 2009 low to the 2010 high) rests at $79.75.

These three chart levels align at the $80 level to form an important confluence support… and thus turning point in the market.

Should the Dollar continue its decline through this confluence support, then that would set-up a potential longer-term target for a move back down to the $74 level seen in late 2009.

Should the Federal Reserve actually go through with its plan to “help the economy in any way possible,” then we can anticipate a move that could take us down to that level.

What seems to be happening now is market expectations of action, rather than actions themselves, but whatever the case, participants in the Dollar will need to watch the $80 level extremely closely.

A break under that level could be quite significant.

Corey Rosenbloom, CMT
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3 Responses to “The All Important Level to Watch on the US Dollar Index”

  1. michaelD Says:

    “While QE may indeed help stocks and the general economy…”

    help stock prices? yes
    help commodities prices? yes

    help the general economy? not so much. it has seemed to have helped the appearances … its tattooed the lipstick onto the pig … but i don't see the economy turning. and since this debasement of the dollar has the effect of giving something like 90% of the population a buzz-cut on the power of their earnings, i don't see the improvements. but thats just me.

  2. Corey Rosenbloom, CMT Says:

    I tend to agree, but the economy improved in 2009 due to Cash for Clunkers, the $8,000 homebuyer tax credit, and all sorts of maneuvers that rewarded consumers for buying. The key issue appears to be the consumer, and reduced demand. It's sort of a catch-22… if the economy recovers, then stocks will rise naturally and if the economy falters further, the Fed will step in to support it/prop it up which could result in another 2009 scenario where stocks go up artificially. Fascinating times we live in.

    I think the Fed realized the 2010 decline from the April highs was in part due to them removing some of the QE methods, and now they're likely to bring them back if things weaken.

  3. michaelD Says:

    i think we're more or less agreeing. the fed is helping the markets, not the economy. if i buy six of something this month instead of buying two of them for each of the next three months then there is no net change. esp if i've done it because the gov't paid me to do it.

    they're not improving the economy, they're improving the appearance of the economy.

    of course, that has little or nothing to do with the markets. the old saying about not confusing a company with its stock comes to mind. my allegory is to not confuse an economy with its markets.

    but thanks just the same. i find your TA work fascinating. and the fact that you're so open-minded about such things is really refreshing; esp wrt all the book-talkers out there.