DXY US Dollar Index
Updated
This is my long term (monthly) technical analysis of the DXY. I use four methods being basic price action/chart patterns, channel lines and patterns, fib. retracement levels and the RSI.
We then discuss possible scenarios. For the purpose of this analysis I will refer to the Index as a "price" for consistency. This analysis is for educational purposes only and not financial advice, you should form your own opinions and investment decisions.
Price action analysis:
1) Price is making higher lows since 2008, indicating an uptrend since 2008.
2) Lower highs also visible since 2017.
3) Combined these look like the start of a symmetrical triangle which has a bullish continuation bias and about 55-60% chance of continuing to the upside. The technical target for a break to the upside is the 2002 high.
Discussion:
As a rule of thumb, I look for at least a third touch of the upper or lower triangle lines before a breakout, and the time between each touch is approximately 30 months for the lower line and 39 months for the upper line.
Then a touch of the upper line is due by July 2024, and the bottom due by July 2025. A touch up or down well before these dates may indicate the short term sentiment.
The upper line was rejected sharply in 2017 and 2020 indicating bearish sentiment at those times. A break out is due by 70% into the pattern, meaning it may simply range, not breaking up or down for a few years (2028-2030)
Channel line and pattern analysis:
1) channel lines indicate the long term trend is down
2) median line (dashed line) holding as support since 2015 (mostly)
3) In the monthly lows we can see some rounded bottom fractals that occur in the lower half of the channel, with circle breakouts/consolodations in the upper half of the channel.
Discussion:
We can fit circles to these rounded bottoms and these circles are approximately 12.5 years in diameter and almost equal to the channel height. In fact, the top of each circle can serve as a resistance level (indicated by red lines). A breakout of the circle has resulted in rapid bullish action in the 80's, late 90's and more recently, sideways action with bullish continuation bias (bullish because it is in the upper half of the channel and is a symmetrical triangle which is a continuation pattern). Judging by the distance between each circle, we may be due to enter into a fourth circle soon, however, the distance between each circle appears to be lengthening and this may not happen for a while. I have drawn a fourth circle in anticipation that it will drop to the lower half of the channel at some point in the future, and when it does, it is a simple matter to "slide" the circle up/down the channel line in anticipation of another "rounded bottom" fractal.
Fib analysis:
1) Key fib levels (as I define them) are at 70.78, 87.43, 104.1, 120.72 (2002 highs)
2) It has been ranging between 87 and 104 since 2015
Discussion:
We need to see (of course) whether the fib lines break up or down. A break of 104.1 to the upside and it can continue to the upper channel line resistance and Jan 2002 highs (1.5 fib level).
A break of 87.43 to the downside and it can retest the 2008 lows of 70.780. It is also possible to simply range between 87 and 104 levels for some time.
RSI:
1) hidden bullish divergence (price making higher lows and RSI lower lows)
2) falling wedge pattern visible.
Discussion:
The falling wedge looks to be just breaking to the upside (or not, with room for error), which could coincide with price touching the upper triangle line or 104 price level.
Overall analysis:
My overall guess is that the DXY will show strength into mid 2023 to early 2024, but ultimately at some point after that will fall again into the lower half of the long term descending channel, and create some kind of rounded bottom fractal.
Short term bullish scenario: Price is ranging within a bullish continuation pattern (symmetrical triangle) in the upper half of the descending channel. There is some bullish RSI divergence and the falling wedge on the RSI may have broken to the upside, indicating continuing momentum up. This may result in price moving higher to test the upper triangle line or fib level at 104, and possibly move higher to the red resistance line at 114 and 2002 high at 120. We will see how the price behaves at these levels, but I would not be surprised if it is rejected to give a "third touch" of the upper triangle line. Judging by the distance between line touches, this is due to occur by mid 2023.
Short term bearish scenario: If the RSI bullish momentum does not continue, price may test the lower triangle line (also the channel median line), for a third touch, at which point a breakdown could see the lower half of the channel entered earlier than expected. There is no guarantee that the triangle will break upwards, however any breakout may be slowed by the upper channel line resistance, and then the 2002 high at the 120 level (also being a triangle breakout target).
I am long term bearish for the simple fact that the long term channel is sloping down, and I may be biased by some expectations of long-term fundamentals.
We then discuss possible scenarios. For the purpose of this analysis I will refer to the Index as a "price" for consistency. This analysis is for educational purposes only and not financial advice, you should form your own opinions and investment decisions.
Price action analysis:
1) Price is making higher lows since 2008, indicating an uptrend since 2008.
2) Lower highs also visible since 2017.
3) Combined these look like the start of a symmetrical triangle which has a bullish continuation bias and about 55-60% chance of continuing to the upside. The technical target for a break to the upside is the 2002 high.
Discussion:
As a rule of thumb, I look for at least a third touch of the upper or lower triangle lines before a breakout, and the time between each touch is approximately 30 months for the lower line and 39 months for the upper line.
Then a touch of the upper line is due by July 2024, and the bottom due by July 2025. A touch up or down well before these dates may indicate the short term sentiment.
The upper line was rejected sharply in 2017 and 2020 indicating bearish sentiment at those times. A break out is due by 70% into the pattern, meaning it may simply range, not breaking up or down for a few years (2028-2030)
Channel line and pattern analysis:
1) channel lines indicate the long term trend is down
2) median line (dashed line) holding as support since 2015 (mostly)
3) In the monthly lows we can see some rounded bottom fractals that occur in the lower half of the channel, with circle breakouts/consolodations in the upper half of the channel.
Discussion:
We can fit circles to these rounded bottoms and these circles are approximately 12.5 years in diameter and almost equal to the channel height. In fact, the top of each circle can serve as a resistance level (indicated by red lines). A breakout of the circle has resulted in rapid bullish action in the 80's, late 90's and more recently, sideways action with bullish continuation bias (bullish because it is in the upper half of the channel and is a symmetrical triangle which is a continuation pattern). Judging by the distance between each circle, we may be due to enter into a fourth circle soon, however, the distance between each circle appears to be lengthening and this may not happen for a while. I have drawn a fourth circle in anticipation that it will drop to the lower half of the channel at some point in the future, and when it does, it is a simple matter to "slide" the circle up/down the channel line in anticipation of another "rounded bottom" fractal.
Fib analysis:
1) Key fib levels (as I define them) are at 70.78, 87.43, 104.1, 120.72 (2002 highs)
2) It has been ranging between 87 and 104 since 2015
Discussion:
We need to see (of course) whether the fib lines break up or down. A break of 104.1 to the upside and it can continue to the upper channel line resistance and Jan 2002 highs (1.5 fib level).
A break of 87.43 to the downside and it can retest the 2008 lows of 70.780. It is also possible to simply range between 87 and 104 levels for some time.
RSI:
1) hidden bullish divergence (price making higher lows and RSI lower lows)
2) falling wedge pattern visible.
Discussion:
The falling wedge looks to be just breaking to the upside (or not, with room for error), which could coincide with price touching the upper triangle line or 104 price level.
Overall analysis:
My overall guess is that the DXY will show strength into mid 2023 to early 2024, but ultimately at some point after that will fall again into the lower half of the long term descending channel, and create some kind of rounded bottom fractal.
Short term bullish scenario: Price is ranging within a bullish continuation pattern (symmetrical triangle) in the upper half of the descending channel. There is some bullish RSI divergence and the falling wedge on the RSI may have broken to the upside, indicating continuing momentum up. This may result in price moving higher to test the upper triangle line or fib level at 104, and possibly move higher to the red resistance line at 114 and 2002 high at 120. We will see how the price behaves at these levels, but I would not be surprised if it is rejected to give a "third touch" of the upper triangle line. Judging by the distance between line touches, this is due to occur by mid 2023.
Short term bearish scenario: If the RSI bullish momentum does not continue, price may test the lower triangle line (also the channel median line), for a third touch, at which point a breakdown could see the lower half of the channel entered earlier than expected. There is no guarantee that the triangle will break upwards, however any breakout may be slowed by the upper channel line resistance, and then the 2002 high at the 120 level (also being a triangle breakout target).
I am long term bearish for the simple fact that the long term channel is sloping down, and I may be biased by some expectations of long-term fundamentals.
Note
Reaction off red resistance line as expected, let's see if it drops again into the circle pattern in the future
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