This was a bleak week for the few remaining US dollar bulls, starting with news that an agreement was forthcoming on European debt and culminating with the FOMC announcing QE3 on Thursday. A look at the spot US dollar index weekly chart shows these moves shouldn't have surprised anyone given the sharp downtrend the index has been in since late July.
If you count back eight weeks from the right on the weekly chart, you see that the week of July 23, 2012 the index established a bearish key reversal. It traded above the previous week's high of 83.644 and the recent high of 83.829, moving to a peak of 84.100. It then fell below the previous week's low of 82.734 before closing below the previous week's settlement of 83.478.
At the same time, weekly stochastics (bottom study) posted a bearish crossover as the faster moving blue line (82.26%) finished the week below the slower moving red line (83.95%). With both above the overbought level of 80% indications were relatively clear that the trend of the index had turned down.
Also note that the high of 84.100 was a test of longer-term resistance at 83.424, a level that marked the 67% retracement of the previous downtrend from 88.708 to 72.696. While the index poked its head above this resistance during the course of the week, the weekly close of 82.709 was back below, another confirmation of a likely top.
Since then the index has been gaining bearish momentum, moving into freefall mode the last two weeks. This week has seen the index trade to a low of 78.601 (so far), nearing its next level of support at 78.398. This marks the 50% retracement of the previous rally from the low of 72.696 through the high of 84.100 when the bearish reversal was established.
In addition to testing support, weekly stochastics have moved into an oversold situation below 20%. This sets the stage for a possible bullish crossover, a technical signal not seen since the week of May 2, 2011 when the previous long-term low (72.696) was posted.
The bottom line is this: the US dollar index could be looking at a bullish turn in trend, though that turn could still be a week or two away. Support could be found near the previously mentioned retracement level, with next support between 77.052 and 76.459 unlikely to be tested given the already oversold conditions. If the index does start to slowly turn, commodities could be looking at an inverse move to a downtrend. But, more on that in Saturday's blog post.
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