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Talking Points
- Testing key moving average again
- Important move on the horizon?
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US Dollar Index: Make or Break Time
The dollar looks to be at a critical juncture. Earlier this week the FXCM USDollar Index (equally weighted basket of USD versus EUR, JPY, GBP & AUD) tested and successfully held above the 200-day moving average (on a daily closing basis). This was the third time the widely watched moving average has been tested in the last eight weeks. The way I see it, the index either continues higher here and the broader uptrend begins to reassert itself or the index breaks the 200-day and drops sharply. Why, you ask? The Gann Rule of Four.
As the name suggests, the Rule of Four was a concept written about by WD Gann. It essentially states that the 4th attempt on any important support or resistance level will usually result in a significant market movement when that support or resistance level is penetrated. An obvious corollary to this rule is that a 3rd attempt on this key support/resistance that fails to penetrate, can result in a significant reversal in the opposite direction. Factor in the above with the fact the index has been consolidating for six months and building energy during this time for an important directional move and it looks like it has become make or break time for USD.
The turn down this morning in the USDOLLAR obviously puts the index on the back foot and in a negative position. A daily close below 11,920 would confirm an significant break and set the stage for an important move lower. Immediate resistance is seen around 11,970, but traction over the 50-day moving average at 12,000 is really needed to confirm a more important turnaround in USD. This is quickly looking like the least likely scenario.
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
To contact Kristian, e-mail instructor@dailyfx.com. Follow me on Twitter @KKerrFX
