Tuesday, February 21, 2017

"Dollar Index: The Chart Everyone is Talking About"

I'm thinking that, in its long and storied history, this headline from their head of global currency strategy at his personal blog, is the closest (proximity) Brown Brothers Harriman & Co. has ever gotten to clickbait.
DXY 101.37. up 0.420.

From Marc to Market:

Here is the chart nearly everyone is discussing. The Dollar Index appears to be carving out a potential head and shoulders pattern. The left shoulder was shaped by the rally to 102 after the US election.

It fell a little below 99.50 in early December before launching the year-end rally that took it toward 103.80. That area was retested in this year before the downtrend in January and forms the head of the pattern. The Dollar Index bottomed on February 2 near 99.25. It has rallied this month and reached 101.75 last week to frame the right shoulder.

The neckline is drawn by connecting the early December and early February lows, as we have done on this Great Graphic, created on Bloomberg. The importance of such chart patterns lies in the measuring objective. The pattern is a little more than a 400 point pattern, which when flipped over, suggests an objective of around 95.50, which is the around where the Dollar Index consolidated last August and September.

We are not convinced it is a head and shoulders top. Often volume numbers are helpful in validating a pattern, but in the foreign exchange market, daily volume is not accessible. At a minimum, the pattern requires a break of the 99.25-99.50 area, which also houses the 38.2% retracement objective of the rally since last year's lows in May below 92.00. Other technical indicators, like the RSI and MACDs, are trending up.

In fact, the Dollar Index gapped higher today. Yesterday's high was 100.98 and today's low is 101.08. While it seems true that prices abhor a vacuum as much as nature and the gap below the market may suck prices into it. However, it is not clear the type of gap it is, and the longer it goes without being filled, the more bullish it appears.

Nevertheless, until the Dollar Index rises above where the shoulders of the pattern are ostensibly found (101.75-102.05), some participants may be wary. The first indication of the validity of the bearish read would be a break of last week's low (~100.40-100.45). But, confirmation of the pattern requires a break of the neckline....MORE