Dollar index near strong support level

The dollar index is near a support level, cautioning greenback bears that a bounce is probable. Even though the long-term trend of the dollar is bearish, a corrective rally is highly likely.

Markets never move continuously in a single direction and often undergo corrections during a long-term trend. The bearish dollar is finally reaching an area of support in the range of 74.12 to 74.70 that can trigger a correction. The dollar index closed at 74.86 on Friday. The last time the dollar index hit the 74 level, it triggered a 20% rally.

The strength of the rally is not clear right now but the index has the potential to reach the 76 level. However, on the way down the index created a lot of resistance areas, making a strong rally difficult.

As a trading strategy, we would take some profits a little above the support level in our short positions and also initiate some long positions for quick profits. Remember that the long-term trend of the dollar is down, hence any long positions should be day or swing trades and not long-term investments. It’s okay to hold on to short dollar positions if they are in profit, but now is not the time to initiate new short positions.

A few weeks back it was mentioned that the dollar broke a six year consolidation pattern to the downside and could continue its long-term secular bear trend. Recent price action supports that analysis, but for the short and medium term, we could see a bounce.

Euro-dollar
As the dollar index reached a support level, the EUR-USD pair ran into resistance last Friday. The resistance range is between 1.4486 and 1.4578. The pair closed at 1.4482 last Friday. The pair has the possibility of reversing from the resistance level to fall more than 200 pips to the 1.4225 area.

The pair has been rallying strongly over the past couple of days, after a strong rally since January 2011. This is good sign for bears, as it shows a lot of panic buying by late bulls afraid to miss the rally. Such strong rallies after a strong rise in price tend to reverse giving an excellent opportunity for bears.

Aussie dollar-US dollar
The Aussie has been on a tear against the dollar with the fundamental reason being the rise in commodity prices. The rise in commodity prices is of course triggered by Federal Reserve Bank’s easy money policy. However, with the dollar index reaching support we’d be cautious taking any long positions on the Aussie.

The Aussie too is at a resistance level in the range of 1.0585 to 1.0690. Traders interested in going short against the dollar should wait for a correction. The opposing currency of choice against the dollar would be the Aussie as it’s relatively stronger than the euro.

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