The Incredible Consolidating US Dollar Index July 9

Jul 9, 2011: 5:19 PM CST

If you’ve been following the US Dollar Index over the last few weeks, you’ve probably noticed a clean triangle-style consolidation phase setting up.

Let’s take a look at the recent pause, note the dominant boundaries, and assess the higher timeframe structure in the context of the consolidation.

First, the US Dollar Index – Daily:

The main thing we’re watching is a Symmetrical Triangle consolidation pattern form around the Midpoint or “Value Area” at 75.00.

The price swings are narrowing in a stable, converging trendline pattern with current boundaries resting just above 74.00 (lower) and just above 75.00 (upper).

Those will likely come into play in the week ahead as the index takes one of two structural paths:

1.  Either it consolidates further, ending the week narrower at the $75.00 compression level

2.  It breaks firmly above 75.00 then above 76.00 in a trend reversing upward impulse… or under 74.00 then 73.50 in a trend continuation downward impulse.

Take a look at my prior post “The US Dollar Index Threatens a Trend Reversal” for a bit more insight on the potential “Trend Reversal” structural development – it’s not triggered yet but it’s still on the table.

According to the “Range Alternation Principle,” price alternates/switches between periods of Range Consolidation (like the current triangle) and Range Expansion (like the recent impulse move down before the triangle… and the future breakout move from the triangle).

To get a bigger perspective on structure and context, let’s turn to the Weekly Chart.

US Dollar Index – Weekly Structure:

From a trend progression standpoint, the Index remains in an intermediate (since mid-2010) downtrend.

Refer to my prior post “How to Identify Price Structure in Trends” for a brief review on how we objectively classify ‘market structure.’

Knowing “Trend Structure”  logic is key when referencing the significance of the 76.50 level which would objectively reverse short and intermediate term trend structure.

A failure to reverse above 76.50 here – notice the “Wall of Resistance” I drew – both from a price perspective AND from the falling 20 week EMA (green) suggests the intermediate trend – down – will continue, which opens the door for a fall eventually to 71.

For the short-term, the future outcome of the current Symmetrical Triangle pattern in the US Dollar is key to your trading decisions:

…it suggests a trend reversal to the upside with a bullish break – or “more of the same” downtrend continuation should the index break lower.

Corey Rosenbloom, CMT
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5 Responses to “The Incredible Consolidating US Dollar Index July 9”

  1. Shahar Shlomi Says:

    Hi Corey,

    I've presented a similar analysis of the U.S. dollar last week (on my blog): on the one hand we would want to trade in the direction the triangle breaks, but on the other hand the higher-timeframe downtrend suggests a bearish bias.

    Note that I don't think the dollar index should be preceded by a $ sign: it is a 100-based index, not a share price.

  2. Corey Rosenbloom, CMT Says:

    True – as a trader, it's best to go with the break instead of trying to jump in ahead of the break.

    What tends to propel these actual (as opposed to trap) breaks is one side of the market getting 'squeezed' or stopped-out as they positioned the wrong way of the break.

    In that logic, breaks in the opposite direction of the dominant trend – in this case, a break to the upside – would likely generate a more powerful move (given the bearish sentiment in the Dollar).

    Thanks!  Good point – I went ahead and took out the “$” – it's a habit!

  3. Sunday links: return assumptions | Abnormal Returns Says:

    […] The US dollar index is consolidating.  (Afraid to Trade) […]

  4. Terlyn12001 Says:

    I had thought it was a 4th wave and that it would break to the downside. EWI's top analysis was a wave 2 and would break to the upside. So far this morning, looks like they were right.

  5. Craig Says:

    The dollar index is what most mainstream media outlets refer to when talking about the dollar strengthening or weakening!