By James Hyerczyk
Commodity Trading Advisor
After gapping higher to start this week’s trading session, the U.S. Dollar Index is in a position to post a strong gain for the week. Bullish traders would like to see a close over 80.18. This would put the index higher for the year and set it up for a possible follow-through rally next week. Besides the close on December 31, the Dollar Index is also nearing swing top resistance at 80.74 as well as 50% of a major trading range at 80.71.
Taking a closer look at the Weekly U.S. Dollar Index chart, traders will note that closing above last year’s close at 80.18 is no guarantee that the index will continue to rise. Downtrending Gann angle resistance drops in at 80.72. This angle combined with the 50% price level and the main top help form a resistance cluster between 80.72 and 80.74. A breakout above this level could trigger an acceleration to the upside since the next major top is at 81.78.
With the momentum building to the upside, traders should look for a breakout above the current resistance cluster during Friday’s trading session or early next week.
After looking at the Weekly U.S. Dollar chart pattern, traders have to be asking themselves, “What could trigger a near-term breakout in the index?” One currency pair that could help drive the Dollar Index higher is the Weekly AUD USD.
This week, the AUD USD demonstrated its weakness when it broke through a key 50% price level at 1.0121. Selling pressure continued after the initial break down, but slowed as the market neared uptrending Gann angle support at 1.0007. At this time, this currency pair is resting on a downtrending Gann angle from the 1.0856 top at 1.0056. Next week the pair of Gann angles and the 50% level all converge creating a major pivot area. A break through this support cluster could trigger an acceleration to the downside. A sharp drop in the Aussie Dollar will help boost the U.S. Dollar.
A weaker NZD USD will also help boost the value of the U.S. Dollar Index. After consolidating for several weeks, the Kiwi broke through a swing bottom at .8058 two weeks ago, changing the main trend to down on the weekly chart and setting up the currency pair for further downside action.
Based on the main range of .7114 to .8842, the first price to fall was the 50% price level at .7978. This was followed this week by a break through 50% of the .7369 to .8470 range at .7919. With the New Zealand Dollar/U.S. Dollar pressing to move lower into the close on Friday, the next downside target is a Fibonacci support cluster at .7790 to .7774. A break through this cluster should be bullish for the U.S. Dollar since according to the chart pattern, there appears to be plenty of room to the downside.
Another move by a currency pair either late Friday or next week that could drive up the U.S. Dollar Index is the Dollar/CAD, or USD CAD. As of Friday morning, this currency pair is attempting to breakout to the upside over a key 50% level, a downtrending Gann angle and a main top.
Let’s breakdown this chart pattern starting with the main range. The bottom of the main range was formed in late July at .9406. This bottom triggered a rally until the week-ending October 7 when the USD CAD topped at 1.0657, creating a range bounded by .9406 to 1.0657. This range created a retracement zone at 1.0032 to .9884. For most of 2012, the Dollar/CAD traded inside of this range. Recently it tried to breakout to the downside, but that attempt was thwarted, creating the upside momentum that is currently trying to trigger a breakout above the 50% price level at 1.0032.
Since creating the .9406 to 1.0657 range, Gann angles drawn from the bottom and the top have formed a clean triangle chart pattern. Two weeks ago an uptrending Gann angle stopped the break. This week, the market is poised to breakout over a downtrending Gann angle at 1.0037.
Swing chart analysis indicates that the main trend was down to start the week, but by crossing the swing top at 1.0052, the main trend turned up on the weekly chart. This usually leads to a volatile move to the upside.
Now that the USD CAD is beginning to make its move through the 50% price level at 1.0032, the downtrending Gann angle at 1.0037 and the swing top at 1.0052, upside momentum is expected to increase. In order for any momentum move to succeed, there must be rising volatility and rising volume to demonstrate that buyers are adding to the move.
If the breakout materializes as expected, then look for the market to launch a strong rally. The short-term range is 1.0657 to .9799. This range has created a retracement zone at 1.0228 to 1.0329. A successful breakout rally should reach this retracement zone over the near-term if it gets the support it needs. If this move takes place then the U.S. Dollar Index should also benefit.
I started this article with a bullish bias on the U.S. Dollar Index, but conceded that it would need some help to trigger the projected upside breakout. The currency markets highlighted in this article are all in position to move with strong momentum. While a slow breakout can also take the U.S. Dollar Index higher over time, many traders will agree that there is nothing better than a strong breakout move fueled by trader clarity and conviction.