Dollar index is back to resistance

The dollar index rallied from support as predicted last week and is now back to the resistance level of 81.25. A breakout can take the index to 82.50.

The 81.25 level has been hit earlier in late November 2010 from where it sold off and found support at the 78.75 level. Since late November in the index has been range bound between the 78.75 and 81 levels. As the index is at resistance we are bearish for next week. A look at the chart shows us that it’s easier for the index to sell off than rally as there are only weak support areas between Friday’s close and the key support level of 78.75.

However a breakout of the resistance can take the index higher, but there are quite a few resistance areas between 81 and 82. And right above 82 is a strong resistance band of 82.50 to 83.
The stock markets on the other hand favour the dollar bulls as both the S&P 500 and Dow are near key resistance levels. Usually the dollar rises when the stock market falls, as investors shy away from risk.

US dollar-Indian rupee
As predicted in last week’s article, the rupee caught a slight bounce from the support area of 44.50. The level between 43.85 to 44.50 was a strong support area from where the USD-INR rallied. Now as the pair comes down to that level again it’s getting support. USD-INR has been moving in a range just like the dollar index. However, we see relative strength in INR versus USD as the dollar index has reached its late November highs, but the pair has not.

This means that if the dollar index falls from its current resistance level at 81.25, the rally in INR will be much stronger than the fall in the index. On the other hand a strong rally in the index will lead to a weaker fall in INR.

Death cross on euro-dollar
The imminent death cross that we mentioned in the previous two articles in the euro-dollar (EUR-USD) has finally happened. A death cross, which is seen as a bearish signal, happens when the 50-day moving average crosses and falls below the 200-day moving average. We use the exponential moving averages for faster signals.

Last week after the death cross, EUR-USD fell strongly and broke several minor support levels and also a key level at 1.2950. The pair closed at 1.2905 last Friday. The next strong support level on the pair is between 1.2575 and 1.2775. Even though the path down looks clear, keep an eye on the dollar index. If it falls EUR-USD will not. Also keep in mind that death cross is an extremely delayed confirmation of a bear market.
Fake out in Australian dollar-US dollar

The new high this year in AUD-USD turned out to be a fake out instead of a break out. As the dollar index rallied from support, the pair sold off. Last week we had suggested buying a pullback to previous of 1.0175 after the break out. However, since the pair really did not break out there was no pull back to buy into, just a sell off after the fake out.

Last Friday, AUD-USD bounced a bit from its 50-day moving average, which tends to act as support. The pair has support at 0.9850 followed by 0.9760, 0.9750 and 0.9586. On the other side, the pair has an excellent selling level at 1.0225.

US dollar-yen
In line with the dollar index, the USD-JPY too bounced. The pair bounced making a higher high which is bullish. But the dollar index which is at resistance has to continue to rally, to support USD-JPY. In case the pair breaks above 84.51, it can rally all the way up to the 85.71 level. This is crucial level, where the intervention by the Japanese authorities failed and the yen turned to make new highs.

The writer is editor, www.capturetrends.com, and is based in Chicago.