U.S. DOLLAR INDEX

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Lately I’ve been focusing more frequently on the currency markets and especially on crossrates against the U.S. dollar. Several developed and emerging market currencies are forming major reversal patterns (inverted Head & Shoulder) that is bullish for the dollar in the short/medium-term.

http://techcharts.wordpress.com/2012/01/22/u-s-dollar-index-eurusd/ (January)

http://techcharts.wordpress.com/2012/02/11/u-s-dollar-index-eurusd-2/ (February)

Inverted H&S pattern is a widely followed technical chart formation and has a very low failure rate. As a major reversal pattern, Head & Shoulder bottom (inverted Head & Shoulder) forms after a downtrend and its completion marks a change in trend. Head & Shoulder bottom pattern is not complete, and the downtrend is not reversed until neckline resistance is broken. With friday’s close, U.S. dollar index breached its neckline between 81.70 and 82 levels. This should be regarded as a positive technical action for the dollar and would require to search for more evidence that signals dollar strength in the short/medium-term. Below are some of the charts that have similar inverted H&S patterns, either in the phase of completion or already completed. These charts also support the case for dollar strength in the following weeks/months.

USD/BRL broke above its neckline at 1.92 as we have discussed in an earlier update. USD/IDR, USD/SEK are two other crossrates that have breached above their strong resistances. USD/CAD and USD/ZAR are still completing their base patterns. I’m not sure if we are going to see another QE that might put pressure on the dollar but so far, analyzed charts above are signaling an increasing demand for the dollar.

WHEAT

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While global equity markets and commodities are experiencing sharp corrections, an underperforming commodity in the grains complex, wheat started breaking out of its range. Latest technical action is similar to the earlier breakout that wheat experienced in the summer of 2010. In July-August period it took 4 weeks for wheat prices to rally 60% after the breakout.

Wheat is breaking out of its consolidation in a similar fashion by recording a strong weekly close above the 200 day moving average and the trend resistance. Watch this commodity with a bullish outlook by placing an intermediate term stop loss at 650 levels.

USD/TRY (U.S. DOLLAR/TURKISH LIRA)

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USD/TL chart tells us 1.75-1.76 is strong support and unless broken on the downside dollar will continue to stay strong against Turkish Lira. Over the past week, USD/TL rebounded from 1.75 for the third time in the past 7 months. 1.75-1.76 area is long-term horizontal support and also a strong support level for the 200 day moving average. USD/TL will move between 1.75 and 1.90. Watch this crossrate with a bullish outlook (USD strength) with a long-term stop loss at 1.75.

USD/BRL (U.S. DOLLAR/BRAZILIAN REAL)

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U.S. dollar continues to gain strength against emerging market currencies. I’ve analyzed several bullish dollar charts in the past and USD/BRL was one of them. Over the past few weeks we have seen a fast move in USD/BRL, breaking above 1.92; inverted H&S pattern’s neckline. This resulted in a spike towards 2.0 levels and it is likely to continue towards the H&S pattern price target at 2.4 levels. Emerging market currencies are completing 2-3 year-long base formations against the USD and this signals strength for the dollar in the intermediate term.

CBOE VIX (Volatility Index)

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Yesterday’s trading session pushed the Volatility Index higher and CBOE VIX breached the important resistance at 22 levels. This is an important breakout as VIX is now above the inverted Head & Shoulder pattern neckline. Higher VIX signals weakness for equities in the intermediate term. Please note that inverted H&S pattern price target is 30. 22 level will now become support and also stop-loss for long VIX positions.

CBOE VIX (Volatility Index)

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VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period.

In the beginning of March I analyzed the CBOE VIX right after the volatility rebounded from 15 levels to 19 levels. Followed by a short period of equity market correction, optimism improved during March and the volatility index eased towards 14.6 levels. However, optimism in global equity markets didn’t last long and since the beginning of April VIX reversed from 15 levels and reached 22 levels. Three month-long sideways consolidation between 14 and 22 could be an inverted Head & Shoulder reversal chart pattern. This bullish reversal pattern suggests higher levels for the CBOE VIX in the coming weeks if the index breaks above 22 levels, the resistance of the technical chart formation . Please note that extreme pessimism in  equity markets mirrored the re-test of 50 levels on the VIX.

A decisive break above 22 levels can be followed by a surge in CBOE VIX towards 50 levels once again. In the past four years April-May period proved to be negative for equities.

USD/BRL (U.S. DOLLAR/BRAZILIAN REAL)

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The longer it takes for a chart pattern to develop, the more significant it becomes. Breakout from a long-term base formation should be respected. U.S. dollar has been gaining strength against some of the emerging market currencies over the past one year. Though we haven’t experienced a major shift from emerging market currencies to U.S. dollar, reversal chart patterns spread over time and became more visible. One of those emerging market currencies that has been forming a possible long-term reversal chart pattern (inverted Head & Shoulders) is the Brazilian Real. USD/BRL has been bottoming between 1.5 and 1.9 over the past 3 years.

With the latest breakout from a sideways consolidation range at 1.84 levels, USD gained strength against BRL. Currency pair is now challenging the last important resistance before breaking higher. Watch this highly traded emerging market currency for a confirmation of the breakout above 1.92 levels. A decisive close above 1.92 levels will confirm the breakout from a 3 year-long base formation and will target 2.4 levels in the following months.

EUR/USD

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EUR/USD continues to consolidate in a tight range between 1.33 and 1.305. Over the past 3 months currency pair formed a contracting range (symmetrical triangle) that is likely to be followed by a strong trend period. As we get closer to the apex of the triangle formation, probability of breaking out in one direction is increasing. It is always better to wait for a confirmation in the form of a daily or weekly close above/below major support/resistance levels. In this case we will be watching two important levels 1.305 as a support and 1.33 as a resistance. Though in the short-term a break above 1.33 will be positive for Euro, in the intermediate-term outlook will turn to positive only after we see EUR/USD crossing above the 200 day moving average at 1.34.

EUR/USD

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It has been a busy week with several economic data releases. However it’s not over yet! Today market expects U.S. Q1 GDP. Expectation is to be around 2.5%. 4Q’11 was at 3%. Over the past few days housing data and jobless claims were disappointing. A the back of news flow from Euro Zone (disappointing Italian bill auction yesterday and bond auction expected today…) and U.S., EUR/USD has consolidated in a tight range between 1.33 and 1.30. If we look at the larger picture, EUR/USD is in a downtrend with the crossrate trading below the 200 day moving average (1.34) and continues to remain in the downward trend channel. However, in the short-term it is more of a sideways consolidation that will see a strong breakout in one direction. 1.33-1.34 area is strong resistance and if it is broken on the upside it will signal intermediate term strength for EURO towards 1.38 levels. 1.30-1.305 area is strong support. If the cross rate breaks down the support area we will expect dollar strength in the intermediate term towards 1.25 levels. Until we see that major breakout we continue to watch EUR/USD with a neutral short/intermediate term outlook.