Bearish Reversal in the U.S. Dollar Index (DXY) May Just Be Getting Started

Volatility Spikes Could Continue

Progressive bearish signs have led to DXY being positioned to head towards an eventual test of support around the bottom range of a multi-year sideways consolidation channel. However, given the spike in volatility following a bearish reversal on Monday and the creation of a lower swing high, it seems reasonable to anticipate further spikes in volatility in both directions. 

Failed Breakout of Large Sideways Consolidation Pattern

A bull breakout of the sideways consolidation channel initially triggered in mid-November. But it quickly failed before a successful attempt was made a month later in January. That advance eventually led to a high of $110.18 in mid-January, which was a 113-week high for DXY. Notice that the advance was initiated following a swing low in September that briefly undercut a previous swing low from December 2023. In other words, a failed bearish trend continuation signal was generated. A bottom was established at a low of $100.16 in late September and it was followed by an upside breakout from a bullish falling wedge pattern. This history is reviewed given the recent failed upside breakout of a large sideways consolidation pattern. It provides a reason to suspect that the DXY could eventually fall to test the lower range of the pattern as it swings in the other direction.

Support Watch at 61.8% Retracement

Given the bearish trajectory of the DXY it looks likely to at least complete a 61.8% Fibonacci retracement at $103.98 before support is seen that leads to a bullish reversal. If that price zone does not lead to a reversal, the next target could be a prior minor swing low at $103.37, followed by the 78.6% retracement level at $102.30. 

Advance to Test Prior Support as Resistance

Once a counter trend rally begins the DXY has a wide range for a bounce. The neckline of the head and shoulders pattern previously represented support, and it may be tested as resistance during a bounce as an upside target. Last week’s low, around $106.13, can be used as a proxy for the line. Also, the 20-day moving average is $106.75 currently and it could also be tested as resistance as well during a counter-trend rally. For now, it can be considered to represent a possible top resistance level for a rally. Keep in mind that the 20-day moving average is falling, so the price level will continue to approach the neckline. 

First Resistance Zone at 200-Day Moving Average

The neckline and the 20-day line are higher potential targets for a counter-trend rally. But there is a lower potential resistance zone from $105.16 to $105.00, marked by a declining trendline and the 200-day moving average, respectively. That was a potential support zone on the way down but there were no signs of it and the DXY fell right through. Nevertheless, it could mark a resistance zone on the way up. A rally will likely be used by market participants to exit longs and enter or add to shorts given the likely bearish continuation of the head and shoulders breakdown. 

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