Dollar index could continue falling to its nearest support zone

The dollar, which has been range-bound since 2008, is expected to continue consolidating in the near future.

In the immediate few months the greenback can fluctuate between support and resistance.

The dollar index, which measures the dollar against a basket of major currencies, peaked in November 2005 at 92 and bottomed in March 2008 around 72.

Since then the index has not been able to make new highs or lows clearly indicating that the greenback is stuck in a range. The other indication of the rut is the fact that prices have been moving above and below the 30-week moving average, as shown in the chart.
In trending markets, prices stay consistency above or below the moving average.

The dollar index, which hit resistance at 88.50 in June 2010, is expected to continue falling to its nearest zone of support.

The closest support zone is in the area of 79.50 and 80.50. As prices fall, the 30-week moving average may also decline and fall into that zone. This will provide additional support to the index.
Notice that the rally in price from the 80 area was extremely sharp. Such sharply rallies are often retraced and prices are sucked back to the base of the rallies. A look at the commodity channel index (CCI) at the bottom of the chart also shows that the trend is pointing down.

By the time index touches the 80 area, the CCI can be in the negative 150 or 200 area, indicating that the dollar is oversold.

A confluence of price in the support area of 80 along with the CCI in oversold territory will signal a potential uptrend in the index.
The 80 zone, however, is not a strong support as it is an area of price continuation and not an area of reversal like the 74 area.
Price reversal areas are better support or resistance areas than price continuation levels. This means there is a high possibility that prices will break through the 80 level and if it does the next area of support is 77 followed by 74.

Traditionally in rangebound markets it’s best to hold on for extreme price levels. This means that sellers may see the index fall to 74.

They should, however, take partial profits in the 80 range and put stop-losses on the rest of the position in the 86.50 area to lock in some profits till the next support level is hit.

Euro-dollar
As the dollar index has hit resistance, the euro-dollar pair should hit the support range of 1.1630 and 1.1900 and bounce. The pair has been making higher highs and higher lows, indicating an uptrend is in place. It has, however, hit the first area of resistance at 1.2700 and paused. If it breaks out of that resistance, the pair can rally to the 1.3100 area.

Dollar-yen
The dollar and Japanese yen are safe haven currencies and hence move differently than other dollar pairs. So the demand for both the yen and the dollar increase when risk aversion hits the market and vice versa.  So while the dollar declined against majors when the index hit resistance, it rallied against the yen. The yen has the potential to rally to 91 if it clears 89.50.

George Albert is editor, www.capturetrends.com, based in Chicago.