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


The US Dollar Index is forming a major base, and it's moving in the right direction.

I know I sound like a broken record, but I love the US Dollar Index long right now! When you get really good risk reward setups in a market, you need to make sure you take advantage of them because there are only a few times a year when you get that outsized chance for big gains. I think now is the time for the US Dollar Index, and the recent strength could just be the start of a big new bull market for the US dollar.

As you can see in the below chart, the US Dollar Index has held the 77 level like a champ over the past two weeks, and I think this is providing a good base for it to move higher toward my short-term target of 80. Longer term, I think the Index has the potential to trade to 90 relatively easily, with upside surprise potential of revisiting the 2001-2002 highs of 120. If you think I am crazy for seeing upside in the US dollar, great! Sometimes the best trades are those that seem most unlikely to happen!

Click to enlarge

As I have also previously mentioned, a big rally in the US Dollar Index would not be a positive development for commodities. While the recent euro weakness has obviously been a large driver of this US Dollar Index strength, commodity currencies like the Canadian dollar are rolling over as well.

The 0.99 level has proved to be heavy resistance over the past couple of weeks, and I think short-term we are probably in the process of rolling back over to the 0.95 level which was support in early October. Longer term, if this 0.95 support level gives way, my next downside target would be the 2008-2009 lows near the 0.80 level.

Click to enlarge

Another currency at a critical level worth watching is the Japanese yen. I will use the USDJPY cross to talk about this market, so keep in mind it is inverse of the yen when looking at the chart below. After the intervention spike on Halloween (interesting timing, huh?), this market has pulled back to the 77 level which looks like an attractive entry point if the trend is indeed turning in favor of the US dollar.

Click to enlarge

Keep in mind the longer term trend is still in the favor of the Japanese yen, so I would not be willing to risk as much on this trade, but the shorter term trend seems to have turned to favor the US dollar. If this market truly is turning, that would just provide a little extra fuel for my upside bets on the US Dollar Index! Stay nimble and protect capital…things in the currency market might get a little more interesting!

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