USD Index - At a very interesting juncture, both short-term and long-term.

The USD has made big gains over the past few weeks and appears as though it may be setting itself up for some further major gains in the longer time-frame against many of the major currency partners. However shorter-term it faces some key pivotal areas which threaten to check its immediate progress.

Starting with the USD Index (See first chart below): There appears to be a strong possibility that the USD Index may be close to the end of a major basing phase which has been occurring over the period from 2003 to the present. - Further to this there appears to be a startling similarity between aspects of price action during this 2003 - 2012 period and the price action during the major base formed during 1988-98. - Interestingly the 88-98 phase started and ended with 'Head & Shoulders' type formations, and the 2003 - current period price action started with a 'Head & Shoulders' type formation, and has recently formed another 'Head & Shoulders' type formation. - This could of course all be co-incidence, - but the similarities are almost spooky. - Taking this one step further - the basing periods both had 2 major dips in between these Head & Shoulders patterns. - I know history never repeats, but does sometimes rhyme. 

 

Also of interest is the recent price action around the major pivotal zone, highlighted on the above chart by the horizontal dashed lines at around 81.50 and 83.00.As you can see this pivotal zone supported the market in the early 1990s through to 1995 leading to strong rebounds on three separate occasions, this pivotal zone again supported the market leading to a strong rebound in 2004. - Since then this zone has been centre of a wide range, with breaks leading to large moves of around 5/6 big figures either way and 'failures to break' leading to corrections. - I think longer-term there is a strong possibility that the USD Index is setting itself up for a major rally, which may turn out to be far more significant over the next couple of years than many people think, in the short-term however there is a possibility that the move may pause and perhaps even retrace a bit. - But, to add a little caveat, there is a risk that it may just continue heading North pretty much from here.
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In the shorter-term however I think there may be a chance that this is setting up for a pullback if not an extended pause: - The recent break above the top of the pivotal zone last week hit 83.50 before returning promptly to just below 83.00 where it is currently. Interestingly however was the behaviour of volume as the price moved higher and then peaked: - The chart below shows daily price action and volume over the past few months. During the final phase of the price rally volume was noticeably declining, then the peak of the price saw a sharp reversal on the day occurred with extremely high volume. - This can be seen on the chart below.




This sort of behaviour is typical at market extremes. We can see an example of this on the AUDUSD chart (Below) from earlier this year. Coincidentally this example occurred on the 29th Feb, which was the peak in the AUDUSD and the low in the USD Index over the past few months. - I identified this at the time, and mentioned it in a post that day which can be seen here.

In summary, I thing there is a possibility that the longer-term picture is setting up for further strong USD gains, particularly if it can make a clear and sustained move over 83.00 (A clear rejection of the 83.00 area and a break below Feb's lows would call this view into doubt).  In the short-term however I think there is a possibility that the USD index 'may' pause or suffer some sort of setback soon, possibly extending for several weeks.

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