In the past few weeks, since this blog started, a great deal of attention has been placed on Dollar Index watching. With the FOMC (Federal Open Market Committee) decision to purchase $300 billion of long-term Treasuries, and extend mortgage-debt purchases to $1.45 trillion, the dollar bear crowd is in full force. This was not a surprise. Those who were dollar bulls may be seeing a crime being committed, and there are very few dollar bulls in site. But using the classic tools of trend line channels and Fibonacci resistance levels, the signs were “written” in advance.
In fact, the great lesson learned from the market reaction is that it was not a surprise. The scenario of a Dollar Index breakdown was scripted once the upper trend line channel was in place. This channel started in December 2008 and had taken full form by February 9th when a low of 84.79 was formed. The index then proceeded to a new high of 88.25 on February 18th. It zig zagged back to test the channel line on February 23 at 85.63. We saw a retracement failure there and that was followed by a move up. Using the simple trend line tool, the trader was able to project areas where the next test of support would occur near 87.8. Any probing of that area was an alert to be careful for those following a dollar bull scenario. Drawing an inner upper trend line also enabled a projected alert that the Dollar Index was in trouble if the price met the 88 region. The index probed 88 and broke the inner trend line on March 6. Being a forex detective and using the trend line tool, we have had 6 days of a signature of the presence of the dollar bear. It is a very good lesson in the use of simple tools for assessing market moves.