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Currency Market: Technical View Shows US Dollar Index Preparing for a Big Rally


An explosive rally in the US Dollar Index, now forming a major base, would be bearish for commodities.

Last week, I wrote about the potential setup I am seeing in the US Dollar Index, and I want to touch on this market again, as I think this is a very important development for the current market environment. In general, a rally in the US Dollar Index would not bode well for "risk," and it could be the catalyst for a sell-off for other markets as we head into the end of 2011.

As you can see in this longer term weekly chart of the DX, this market looks to have formed a double bottom around 75 and is currently holding support around 77. The 200-week moving average comes in at 79, and a push through that level could start a whole new bull market for the US Dollar Index, which of course I don't think too many people are expecting. That's why I like this setup!

Click to enlarge

A major rally in the US Dollar Index would obviously be bearish for commodities, and so I have been watching several of the commodity currency crosses (Canadian dollar, Australian dollar, New Zealand dollar) as they have started to roll over and are now all trading below their 200-day moving averages.

The euro is also setting up as a nice short as well, which I mentioned last week (see Currency Market Volatility: Technical View Suggests Market Is Basing). Stay nimble!

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Position in EUO
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