On July 26, readers were alerted to an imminent rally in the U.S. dollar index (DXY).

Since then, DXY has indeed traded about 2% higher.

Can the dollar sustain its current rally, or is it more likely to continue breaking down?

While it’s impossible to know for sure, DXY is flashing a few very important signals that we should be paying attention to…

By keeping an eye on these signals, we can narrow the odds significantly in terms of what we can expect from DXY over the next few months.

That’s why it’s always a good idea to keep a close eye on the technicals of the market. Where fundamental analysis can leave you feeling confused, a price chart is usually much clearer.

Let’s walk through an updated price chart of DXY below. These signals place the dollar at a pivotal juncture. Knowing what to look for can be the difference between making or losing money as a trader.

There are two important things going on with this price chart. The first is the parallel channel (blue lines) that DXY has been trading in over the last few weeks.

When a market turns, as DXY did on August 4, it will almost always start trading within a parallel channel. Breaking the channel is often a strong sign that the move is over, and a new trend is either about to begin or resume.

In the case of DXY, a break of the lower boundary of the parallel channel would likely mean a resumption of the ongoing bearish trend in the dollar.

The second important feature to this price chart is the 200-period moving average (MA). This is an important technical indicator that identifies the medium/long-term trend.

As you can see, the 200-MA has been sloping downwards since DXY broke down hard in early July. This supports the idea of a bearish trend in the dollar.

But the rally in DXY that readers have been alerted to has now broken above the 200-MA.

Now the big question is whether or not the dollar can sustain this rally higher. If it can’t, then we should see the dollar crash through the 200-MA over the next several days.

On August 3, the dollar put in a top and started to trade lower once again. As of writing, DXY is hovering just over both the lower boundary line of that parallel channel as well as the 200-MA.

This is a critical juncture for the dollar and will likely determine whether we see a period of sustained dollar strength or weakness to close out the year.

Happy trading,

Imre Gams

Have you been trading the dollar this year?

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.