The Dollar Index (DXY) is the basket that covers the six major currencies against the US Dollar (USD). The basket includes the Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Japanese Yen (JPY), Canadian Dollar (CAD), and Swedish Krona (SEK). In this post, we’ll review what should be the next path for the Greenback.
The big picture
The Dollar Index is developing a bullish movement recovering the loses of the bearish cycle started at the end of 2016. The weekly chart shows that the ascending pattern looks an ending move. However, before to change the bullish bias, the price should make a false breakout or bull trap.
The Relative Strength Index (RSI) oscillator, known as a leading indicator, shows a bearish divergence. Consider that bearish divergence doesn’t mean that the bullish trend will change. A divergence is only an exhaustion movement signal.
Expecting the False Breakout
A common way to change the trend is when the price makes a trap, this could be a bear o bull trap. In the DXY case, the wedge pattern should end with a bull trap. Is likely that the Greenback climbs near to the 99 pts zone, as a psychological level. After this move, the price should start to decline.
How to trade the next move?
The next question that comes to our mind is: how to trade the next movement if the price makes a false breakout? In our previous post: “Understanding Corrective Waves - Part II”, we presented different trading setups. In this case, the pattern should correspond to an Ending Diagonal. As shows the following chart, if the Greenback closes below 97.52, we’ll start to weigh short positions. The invalidation level could be above the fake out level.
Remember that the price is not compelled to move as our forecast proposes. The charts released corresponds to the Elliott Wave Theory application.