When Will DXY (Dollar Index) Resume Its Devastating Uptrend?
Actualizado
Primary Chart: Linear Regression Channel for DXY on Daily Chart, Upward Trendline from November 2021, and Parallel Channel from 2008 DXY Lows
Since the low on January 6, 2021, DXY (the dollar weighted against a basket of several other major currencies) has ripped about 28.66% higher, causing ripple effects in equity markets, commodities, and international trade. This has been massive run that has pushed DXY to within a proximate range of a 21-year high at 121.05, a level last reached in July 2001 during the bear market of 2000-2002.
Supplementary Chart A: Weekly Chart of DXY with a Parallel Channel Showing the Uptrend Since 2008 along with the 21-Year High on July 2021
The Primary Chart shows a linear regression channel set at +/- 2 standard deviations. The channel runs from the lows on October 27, 2021. The current pullback in the US Dollar Index is nearing a -2 standard deviation move. At the lower edge of the channel will equal -2 standard deviations from the linear regression line (at the center of the channel).
Interestingly, the lower boundary of this regression channel coincides to some extent (not perfectly) with the upward trendline drawn on the Primary Chart. But when the chart is switched to logarithmic, the up trendline runs nearly parallel with the lower bound of the regression channel. This parallel relationship between the up trendline and regression channel's lower boundary is posted in Supplementary Chart B below.
Supplementary Chart B: Logarithmic Trendline from October 2021 to Present Date
Next, consider a slightly longer-term trend reflected by a somewhat longer regression channel shown on a weekly chart. This regression channel shows that the recent pullback has not even reached the midpoint of the channel at the linear regression line, though it could pull back to that area. This somewhat longer-term trend has been shown to illustrate the strength of this trend and to contextualize the pullback, which remains very mild in light of this larger-degree trend. Strong trends generally tend to continue after corrective retracements rather than reverse—though the crash in equities this year shows that strong trends can and do reverse at some point.
Supplementary Chart C: 2-Year Linear Regression Channel from January 2021
Fibonacci price analysis also provides a plausible technical argument for why DXY could end its pullback near the upward trendline support and the regression channel's lower boundary. This Fibonacci projection (or a measured move) appears on the Primary Chart above, and it shows that the 1.00 to 1.272 zone (where the two segments of the current decline are equal or nearly so) ranges from 107.93 to 109.21. Could this be where DXY reverses back higher to continue it's trend? Could this be where DXY moves back into the center of its channel? Given the strength of the trend over the past 2 years, this area seems like a spot where some significant chance exists for a reversal higher. Much will depend on the FOMC meeting on November 1-2, 2022. If DXY turns back higher, then it may well be that equity indices stall around the same time and turn back lower.
Finally, consider a major weakness in the bull case in the intermediate term. Price has tested the top of the very long-term parallel channel now three times, as shown by the blue arrows on the Primary Chart. This makes sense that price would reject here given the long-term nature of this dynamic resistance level at the top of the parallel channel. This area is now weaker, though given the repeated contact price has had with it, including a few minor breaks that didn't last.
Will price reject lower again on the next retest of the return line at the upper bound of the parallel channel? Or will it overthrow the parallel channel's upper bound in a final multi-week exhaustion move?
An alternative is to target 116-117 in the index as the next upside target. If the parallel channel is redrawn on a logarithmic chart, channel resistance has not yet been tested yet in September and October 2022. In fact, the next push higher could test the upper channel on the log chart at 116-117.
Supplementary Chart D: Parallel Channel Drawn on Logarithmic Chart
Feel free to post your argument in the comments below!
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Since the low on January 6, 2021, DXY (the dollar weighted against a basket of several other major currencies) has ripped about 28.66% higher, causing ripple effects in equity markets, commodities, and international trade. This has been massive run that has pushed DXY to within a proximate range of a 21-year high at 121.05, a level last reached in July 2001 during the bear market of 2000-2002.
Supplementary Chart A: Weekly Chart of DXY with a Parallel Channel Showing the Uptrend Since 2008 along with the 21-Year High on July 2021
The Primary Chart shows a linear regression channel set at +/- 2 standard deviations. The channel runs from the lows on October 27, 2021. The current pullback in the US Dollar Index is nearing a -2 standard deviation move. At the lower edge of the channel will equal -2 standard deviations from the linear regression line (at the center of the channel).
Interestingly, the lower boundary of this regression channel coincides to some extent (not perfectly) with the upward trendline drawn on the Primary Chart. But when the chart is switched to logarithmic, the up trendline runs nearly parallel with the lower bound of the regression channel. This parallel relationship between the up trendline and regression channel's lower boundary is posted in Supplementary Chart B below.
Supplementary Chart B: Logarithmic Trendline from October 2021 to Present Date
Next, consider a slightly longer-term trend reflected by a somewhat longer regression channel shown on a weekly chart. This regression channel shows that the recent pullback has not even reached the midpoint of the channel at the linear regression line, though it could pull back to that area. This somewhat longer-term trend has been shown to illustrate the strength of this trend and to contextualize the pullback, which remains very mild in light of this larger-degree trend. Strong trends generally tend to continue after corrective retracements rather than reverse—though the crash in equities this year shows that strong trends can and do reverse at some point.
Supplementary Chart C: 2-Year Linear Regression Channel from January 2021
Fibonacci price analysis also provides a plausible technical argument for why DXY could end its pullback near the upward trendline support and the regression channel's lower boundary. This Fibonacci projection (or a measured move) appears on the Primary Chart above, and it shows that the 1.00 to 1.272 zone (where the two segments of the current decline are equal or nearly so) ranges from 107.93 to 109.21. Could this be where DXY reverses back higher to continue it's trend? Could this be where DXY moves back into the center of its channel? Given the strength of the trend over the past 2 years, this area seems like a spot where some significant chance exists for a reversal higher. Much will depend on the FOMC meeting on November 1-2, 2022. If DXY turns back higher, then it may well be that equity indices stall around the same time and turn back lower.
Finally, consider a major weakness in the bull case in the intermediate term. Price has tested the top of the very long-term parallel channel now three times, as shown by the blue arrows on the Primary Chart. This makes sense that price would reject here given the long-term nature of this dynamic resistance level at the top of the parallel channel. This area is now weaker, though given the repeated contact price has had with it, including a few minor breaks that didn't last.
Will price reject lower again on the next retest of the return line at the upper bound of the parallel channel? Or will it overthrow the parallel channel's upper bound in a final multi-week exhaustion move?
An alternative is to target 116-117 in the index as the next upside target. If the parallel channel is redrawn on a logarithmic chart, channel resistance has not yet been tested yet in September and October 2022. In fact, the next push higher could test the upper channel on the log chart at 116-117.
Supplementary Chart D: Parallel Channel Drawn on Logarithmic Chart
Feel free to post your argument in the comments below!
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Nota
As believable as the rally in DXY looks today, DXY never tagged the up TL or the Fib projections. Interesting that as DXY rises slightly today equity markets squeeze higher. The correlation isn't perfect.DXY still has a chance of tagging the up TL around $109 or the Fib projections from 107.93 to 109.21 in the coming days / weeks.
Nota
On the right is the weekly chart of the dollar index, on the left is the daily chart. The corrective pullback could continue quite a ways without changing the powerful uptrend. The daily chart suggests strong support near the same levels identified in this original post above: $170.93-$109.21.
Nota
DXY seems headed back to highs after bouncing right off its sharp up TL. TGT = 115, and if that is claimed and held, then 116-117 in coming weeks.Nota
Despite choppy price action last several weeks, DXY continues to hold up well above it's upward TL -- both on log and linear charts. Nota
Bull flag formation in DXY. Sure, it may pull back a bit more and reach the lower edge of its parallel channel containing price since YTD highs. Watching for a sharp move up when this flag completes:Nota
The sharp move up from the flag formation never occurred. Were there too many in markets watching the same flag? But DXY could be nearing a key Fib support near 104-105. Pullback still underway. But if DXY reverses back higher above the TL , that would be a failed breakdown = at least one more bullish leg higher.
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