US Dollar Index Threatens Trend Reversal – Level to Watch

Jun 17, 2011: 10:58 AM CST

I’ve been monitoring the changing structure in the US Dollar Index recently, and there is a very critical index level to watch that will signal an official, structural trend reversal on the larger frame.

Let’s take a look at the current price structure and highlight the critical level that will objectively redefine the prevailing trend.

First, the Daily Chart Structure:

When you’re doing any sort of large-scale analysis of a price trend, sometimes it helps to strip away all the clutter and indicators so that you can observe clearly the simple price (trend) structure.

For a recap, “Structure” refers to the prevailing sequence of swing highs and lows as a market makes a directional move.

Uptrends are thus defined as a sequence of “Higher Swing Highs and Higher Swing Lows” and vice versa for structural downtrends.

The Dollar Index is in an objective (undeniable) structural downtrend as seen by the horizontal lines connecting the series of lower swing highs and lows.

However, that structure (progression) is threatened by a looming reversal in the highs and lows at the $76.50 level.

Why?

In June, the index formed a higher swing low just under $74.00 and then rallied up recently into the swing high pivot at the $76.00 level.

A higher low DOES NOT reverse a structural downtrend by itself, but what would reverse the trend objectively is if the index continued on its progression to the upside and rallied ABOVE the $76.00 level.

In other words, to reverse a structural downtrend, price requires a higher low AND a higher high to break the progression.

Thus, it will be important to watch the $76.50 level very closely in the weeks ahead.

Let’s zoom-in on the down-move so far in 2011 to get a better view of the structural level to watch:

It’s helpful to drop to lower (intraday) timeframes to get a clearer picture of structure as it develops.

I also added a simple Fibonacci Retracement grid as drawn.

As if by magic (I’m being sarcastic), price retraced from the confluence of the $76.00 index level and the 38.2% retracement yesterday.

That will be another level to watch for a bullish breakthrough should it develop.

However, the level that defines a new uptrend from a continuation downtrend will be the $76.50 pivot level from the May high.

A breakthrough there reverses the structure to put in both a higher low and a higher high, signaling an objective reversal.

A large-scale reversal to the upside in the US Dollar Index is almost certain to coincide with a reversal to the downside in the stock market, breaking under the critical support areas I mentioned in this morning’s update.  I will be explaining this in more detail in this week’s Inter-market report to members.

Thus, even if you don’t trade the Dollar Index or FOREX, a widescale reversal in the US Dollar Index trend – should that occur – likely sends shockwaves throughout the market (stocks or commodities) you trade.

Unless proven otherwise soon with a strong breakthrough above the $76.50 reversal level, the trend remains lower for the Dollar.

Corey Rosenbloom, CMT
Afraid to Trade.com

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7 Comments

7 Responses to “US Dollar Index Threatens Trend Reversal – Level to Watch”

  1. Slothopmail Says:

    Right. This will come as the S&P 500 breaks below its 200-day moving average and below that long-term uptrend line in place from the March 2009 lows.

  2. Terlyn12001 Says:

    I was watching this too on the daily chart. I'm seeing a triangle forming in UUP, and I'm wondering if this could be a 4th wave in a downtrend on the daily. See chart.

  3. zstock7 Says:

    I took a chance on GOOG. ouch! stopped out.
    here's some news. WSJ
    GOOG the analysts write. “According to our checks, US retail paid-search
    spend is up high-single/low-double digits y/y but below search engine
    marketing expectations of 15-20%.”

  4. FX Trader Tim Says:

    I'm a fib/structure player. I simply trade the two at confluence interday, and do it around news releases in the fx markets. Looks like I've found a kindred spirit.

  5. Sharmac2001 Says:

    I would assume the close above 76 today signals the first step towards a trend reversal in USD. A strong close above 76.50 will usher in a change of trend. Yes?

  6. The Incredible Consolidating US Dollar Index | Afraid to Trade.com Blog Says:

    […] 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 […]

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