Dollar rallying to resistance level

The dollar index is heading to its next level of resistance in the 81.25 to 81.60 area, after rallying from a strong support area a few weeks back.

The next resistance level is likely to be reached this week as the greenback is rallying strongly. A few weeks ago, we had predicted that the dollar would bounce off the support level in the 75.50 area and rally strongly. This was the time when most of the “experts” were claiming that the dollar would head lower. However, the major support for the dollar led to its bounce.

As the dollar approaches resistance it’s time for longs to book some profits in the 81.25 area, by exiting some positions. We’d hold on to the rest of the position with a target in the range of 82.60 to 83.60. Now is not the time to go long on the dollar, as it has already rallied substantially. We would wait for a pullback to the 79.50 level to go long.

There are, however, a few important factors that the charts are showing. First, the index hit the 200-day exponential moving average (EMA) last Friday and paused. The 200-day EMA was at 80.52 last Friday and the index closed at 80.36 after hitting it.

The 200-day EMA often acts as support or resistance. However, note that since early 2008, the dollar index has been moving in a range, with the 200-day EMA being broken through on both, the up and the down side. We hence, expect the 200-day EMA to provide minor resistance and not change the uptrend.

The other important factor to note is that the dollar broke above last week’s high, but the indicator — commodity channel index — did not. This shows weakness in the rally. It’s seems that the greenback may rally to the 81.25 area and then sell off.

US dollar—Rupee
The dollar continues to appreciate against the rupee and is headed to the next resistance level of 46. We had predicted a rally in the rupee from the 44 level a few weeks back. If the 46 level is broken, the dollar can rise to the next levels of resistance, which are 46.75 and 47. In fact, the area between 46 and 47.50 has lots of minor resistance areas, which can slow the advance of the dollar.

US dollar—Yen
This pair continues to rally in line with the dollar index. The pair is trading above its 50-day EMA, which is bullish and heading towards its next resistance level in the 85.70 area. Note that the 85.70 was the level the pair rallied to after the recent intervention by the Japanese authorities, only to sell off to new lows. The 200-day EMA was at 86.54 last Friday and can fall to the 85.70 area over the next few days. This will make the 85.70 a powerful resistance level.

Euro—US dollar
The euro has been particularly weak against the dollar. The dollar index rallied 6.3% from its recent low to last Friday’s high. However, the EUR/USD fell 7.61% in the same period. Right now, the pair is trading below both its 50- and 200-day EMAs, which is extremely bearish. The next support level is in the 1.3070 area, which aligns very well with the resistance level of the dollar index at 81.25. A break of that level on the euro can take the pair down to 1.2890, followed by 1.2725.

Caveats
There will be lot of talk about the war between North and South Korea and the debt crisis in the Eurozone. These can often result in pairs breaking through support and resistance levels.
The writer is editor, www.capturetrends.com, and based in Chicago