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Tiny Pattern in US Dollar Index, with Big Implications

Since mid-2015 the US dollar index has been forming a potential head and shoulders topping pattern (or a double top from the start of 2015). If that pattern completes it signals a significant decline into the 84.50 region. The important point there is "if" the pattern completes. The US dollar index currently remains above the head and shoulders pattern support at 92.485 on the September contract.  But there is a bearish signal forming that could signal a decline toward that support level.

The US dollar index rallied in May, pulled back in June and then rallied again in late June. July has seen the price move in a small triangle pattern just above the May high. If the price breaks the triangle to the downside (near 96 on September contract), it signals a decline to the 94.2 to 94 region. This scenario played out almost exactly in 2015, at the same time of year. The decline in 2015 didn't happen till August. In 2016 it is also likely the price could consolidate in the 94 region for a couple more weeks before making a strong move.

Figure 1. Dollar Index Continuous Chart

After a number of failed attempts to move higher though, if the price starts extending down toward 94 or below there is a possibility the long-term pattern could break, ushering in the more significant decline.

On the other hand, if the price breaks the triangle to the upside (96.65 on September contract), look for a rally back toward primary resistance in the 100 region.

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