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John: Recently, much has been written about the U.S. Dollar.   On the one hand the monetary theorists look ahead and predict the demise of the greenback but on the other hand politicians around the globe demand that the U.S. Dollar not be allowed to deteriorate in value as the Federal Reserve (if not the Obama Administration) seems to desire.  There are competing forces at work here.

At BMR we believe it’s important to keep a close eye on the value of the U.S. Dollar as there is generally an inverse relationship between the Dollar and Gold.  It appears Gold is going to move higher no matter what the U.S. Dollar does (the 2 can move in tandem), but a weakening Dollar gives Gold additional fuel and can accelerate a rise in the yellow metal.  Commodities in general will also rise when the Dollar falls in value.

Today we analyze the chart of the U.S. Dollar Index to find out what to expect in the near future.   The Dollar Index is a method of determining a relative value for the U.S. Dollar in terms of a weighted basket of other currencies – the Euro, Canadian Dollar, Japanese Yen, Swedish Krona, British Pound and the Swiss Franc.

On Friday the Dollar Index opened at 79.79, drifted down to a low of 79.72, and then climbed to a high of 80.52 before closing at 80.36 for a gain of 0.61 (0.76%).

Looking at the 6-month daily chart we see that from mid-June to the first week of November, the Index declined in a 3-wave Corrective Phase from 88 down to a low of 75.58. Since then it has reversed and on Friday it made a significant move by breaking above the 80 level (green line) which was resistance and now support.  Also shown are resistance levels (blue horizontal lines) at 81, 82 and 83.5. The daily SMA(200) moving average (blue), currently at 81.74, makes the 82 level particularly strong resistance.

A set of Fibonacci levels are shown covering Wave #3 of the Corrective Phase. This wave reversed and retraced to the 50% level, declined and then continued up to a high of 80.52, the same as the 61.8% Fibonacci level. This demonstrates how reactive the Index is to Fibonacci retracement levels. The Index is now moving in the band between 80 and 83.5 which is a resistance band with the 82 level providing very strong resistance.

Looking at the Indicators:

The RSI is pointing up at 67 indicating we can expect the Index to move higher – bullish.

The Slow Stochastics has the %K (black line) at 95%, poised to break down over the %D (red line) at 94%.  This is creating an “M” formation, similar to the one in August.   This formation usually precedes a decline in the Index.

The ADX trend indicator has the +DI (green line) at 29 and above the -DI (red line) at 23 with the ADX (black line) trend strength indicator at 23. This orientation indicates a weak bullish trend.

Outlook: The chart and indicators show we can expect the Dollar Index to continue to climb in the immediate future but it will encounter very strong resistance around the 82 level and likely resume its primary downtrend from there.