U.S. Dollar Index Futures (DX) Technical Analysis – Still Looking at Long-Liquidation, Major Short-Selling Hasn’t Started Yet

We’re going to be watching trader reaction to yesterday’s low at 98.620 on Thursday. Since we’re in a momentum driven market, trader reaction to this level is likely to determine the direction of the December U.S. Dollar Index on Thursday.
James Hyerczyk
U.S. Dollar Index

The U.S. Dollar is trading flat against a basket of currencies early Thursday, but still in corrective mode after hitting a multi-year high just two days ago. The dollar is now in a position to close lower for the week amid signs of a slowdown in U.S. economic growth and a deepening of global trade tensions.

At 05:03 GMT, December U.S. Dollar Index futures are trading 98.700, up 0.011 or +0.01%.

The selling pressure is being fueled by a drop in U.S. Treasury yields, which is making the dollar a less-attractive investment. Yields are falling because weak economic data has put an October Fed rate cut back on the table.

The dollar hit a top against a basket of currencies on Tuesday when data showed a sharp decline in factory activity that sent bond yields and stock prices tumbling. The selling continued on Wednesday after data showed hiring by U.S. private employers had slowed in September. Both reports indicate that the trade war between the United States and China is taking its toll on the U.S. economy.

The direction of the U.S. Dollar is being primarily driven by the drop in Treasury yields. On Wednesday, Treasury yields fell as employment figures showed the U.S. economy is headed for a slowdown.

As of Wednesday’s close, traders were pricing in a 75% chance of a Fed rate cut at its October 29-30 policy meeting. This is up from 62% on Tuesday and about 20% last Friday. The Dollar Index could continue to weaken until traders have fully priced-in a 25-basis point rate cut.

Daily December U.S. Dollar Index

Daily Swing Chart Technical Analysis

The main trend is up, but momentum has shifted to the downside following Tuesday’s closing price reversal top and yesterday’s subsequent confirmation of the potentially bearish chart pattern.

The main trend will change to down on a trade through 97.560. A move through 99.305 will negate the closing price reversal top and signal a resumption of the uptrend.

The minor trend is also up. A trade through 97.880 will change the minor trend to down. This will confirm the shift in momentum.

The minor range is 99.305 to 98.620. Its 50% level or pivot at 98.965 is potential resistance.

The short-term range is 96.560 to 99.305. Its 50% level at 98.435 is the next downside target.

The main range is 96.960 to 99.305. Its retracement zone at 98.135 to 97.855 is the primary downside target. Buyers could step in on a test of this zone since it represents a value area.

Daily Swing Chart Technical Forecast

We’re going to be watching trader reaction to yesterday’s low at 98.620 on Thursday. Since we’re in a momentum driven market, trader reaction to this level is likely to determine the direction of the December U.S. Dollar Index on Thursday.

Bearish Scenario

A sustained move under 98.620 will indicate the selling pressure is getting stronger. This could trigger a break into the 50% level at 98.435. Watch for a technical bounce on the first test of this level. Buyers may try to produce a secondary higher bottom.

If 98.435 fails then look for the selling to possibly extend into 98.135. We’re pretty confident buyers will show up on a test of this level.

Bullish Scenario

Holding above 98.620 will signal the presence of buyers. This could trigger a rally into 98.965. Look for sellers on a test of this level. They are going to try to form a secondary lower top.

Side Notes

The first break from any major top is usually long liquidation. Short-sellers usually don’t sell weakness. So at some point we’re going to see a retracement of the first leg down. If this market is going to move lower then this is the one to short since a secondary lower top will form.

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