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The US Dollar Index posted huge gains last week as traders flocked backed into the buck. In terms of the points gain the US dollar, the index has actually notched up its strongest two-day advance of the year so far as the price moved from the 90.30 level to the 92.40 area.
A two-hundred-point weekly gains provides a strong testimony to the scale of bullishness towards the US dollar index right now. The EURUSD pair, which comprises around 50 percent of the US dollar index basket incurred its largest two-day sell-off of the year as well.
US dollar bulls now need to crack the 93.45 resistance level this week to really get the bull party started. If buyers can lift the price above the 93.45 level then a huge head and shoulders pattern will be invalidated.
Just to paint a picture of how far the US dollar index could rally if the 93.45 level is broken, we need to first measure the size of the head and shoulders pattern. According to the size of the pattern, a further rally of some 300 points could take place, placing the 96.50 level as a valid target.
Bear currently face another big problem. Negative sentiment towards the US dollar index is at record level. This is providing a huge warning sign to me that last week’s breakout in the buck could continue.
The ActivTrader market sentiment tool is showing that bearish sentiment has just grown and grown over recent days, with some 93 percent of traders now bearish towards the US dollar index.
Just to underscore the shift underway, some 92 percent of traders were bullish towards the US dollar index prior to its huge price advance.
The one-way sentiment shift is likely to lead to further gains the for the US dollar in my opinion as too many traders are bearish. Overall, ongoing sentiment metrics leave the potential for the price to test the 93.45 level.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame a large, inverted head and shoulders pattern is playing out to the upside after last week’s huge technical breakout above the 91.40 resistance level.
The bullish price pattern is predicting that the US dollar index could be about to rally towards the 93.40 area. Traders need to be very careful while the price trades above the 91.40 level in the short-term.
Caution is advised in the short-term horizon as bearish MACD price divergence is starting to form down until the 91.80 level, which means a sharp unwinding could take place at any time.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame, a huge head and shoulders pattern remains the central focus for traders over the medium-term horizon. Whether pattern survives or is invalidated this week is likely to determine the next 300-point move.
If bulls can break the 93.40 resistance level then the US dollar index could surge towards the 96.40 area, however, if the pattern is not invalidated then we could see a sudden pullback towards the 91.40 area, at a minimum.
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