Larry Pesavento: ‘The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar’s value compared only with:
- Euro (EUR), 58.6% weight
- Japanese Yen (JPY), 12.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF), 3.6% weight
This description of the US dollar index from Wikipedia shows the tremendous weight of the Euro versus the US dollar. There is virtually no one willing to take a position on the long side of the Euro versus US Dollar at this point. The past 10 weeks has been a steady downward movement and we’re getting very close to the first target at 125 in the Euro versus the Dollar. As you can see from the long-term weekly chart the Dollar Index is completing a head and shoulders pattern. A rally can not be ruled out. The US dollar index is making a retracement in a bear market and is due for a correction.’
Larry Pesavento: “The US Dollar Index is a good example of using technical analysis to determine trends for entries and exits in foreign currency trading in 2011. The strong trending years of 2007 through 2009 have gone by the wayside. Lets narrow down technical analysis to three areas:
- Pattern Recognition – The chart for 2011 has several AB=CD lightning bolt patterns. In addition, there are several Gartley patterns during the year. HM Gartley describe this pattern in his classic book ‘Profits in the Stock Markets’, published in 1937.
- Fibonacci Ratios – Only the four major ratios of the Fibonacci sequence 0.618, 0.786, 1.27, and 1.618 are needed to describe price movement within the pattern recognition signals. These ratios we are the most common and the most reliable. The goal is to keep it simple rather than reinvent the wheel.
- Cycle Analysis – Using standard cycle analysis from Edward Dewey and James Hearst we come up with a nominal cycle of 62 days. This cycle is repeated four times during the year.
Armed with just a few of these technical analysis tools the market mystery behind the US Dollar Index is not really a mystery at all. Trading comes down to risk control and money management.”