US Dollar Index (DX) Futures Technical Analysis- Bullish Investors Should Wait for Pullback into 92.35 to 92.09

December U.S. Dollar Index futures finished lower on Friday as sellers followed through to the downside after posting a potentially bearish closing price reversal top the previous session. The chart pattern does not mean the trend is getting ready to turn down, but it does indicate the selling is greater than the buying at current price levels. This is often a sign of overbought conditions according to conventional technical indicators.

After reaching its low for the year on September 8 at 90.795, the dollar index has gone on a strong run, primarily driven by a short-squeeze. If you recall, when the dollar was getting beaten down throughout the summer, many investors were loading up on the short side on the notion that the Fed made its last interest rate hike in June.

However, conditions began to change in early September when the market ran out of short-sellers. It was further helped on September 20 when the Federal Open Market Committee left open the possibility of a third December interest rate hike.

Last week, the rally got even stronger when Fed Chair Janet Yellen made hawkish remarks on why the Fed needs to continue tightening despite even admitting the FOMC got its inflation and labor market forecasts wrong.

The current price action suggests that short-covering is continuing to drive prices higher. Sure there is a bid in the market, but the news is forcing shorts to pay up as they pare their bearish positions. I’m pretty confident that its short-covering driving the upside price action because of the retracements and the expected retracements. If this market were truly bullish, buyers would continue to drive it higher without giving investors the opportunity to get long and participate in the rally.

As it stands, short-covering is driving prices higher and the new longs are buying on dips rather than strength.

Daily Technical Analysis

The main trend is up according to the daily swing chart, however, the index posted a closing price reversal top on September 28 and that usually indicates the selling is greater than the buying at current price levels, but not necessarily a change in trend. The trend won’t change to down unless 91.215 is taken out. A trade through 93.495 will negate the closing price reversal top and signal a resumption of the uptrend.

The main range is 96.065 to 90.795. Its 50% to 61.8% retracement zone is 93.43 to 94.05. This zone essentially stopped the rally last week at 93.495, just barely above the upper or 50% level at 93.43.

The new short-term range is 91.215 to 93.495. Its retracement zone is 92.355 to 92.09. This zone is the primary downside target. Since the trend is up, we could see the next wave of buying come in on a test of this retracement zone.