Sunday, December 20, 2009

Chart of the Week: Dollar Approaching Resistance on Weekly Chart?

Try as I may to find something other than the dollar to highlight in chart of the week, I find the dollar’s story to be too compelling to overlook. Also, to the extent that this weekly chart is supposed to reflect an issue that I have been contemplating at some length as of late, I see the dollar as one of the key elements of the 2010 investment puzzle.

In order to get a better sense of the dollar, this week’s chart of the week looks at five years of weekly bars in the dollar index, which compares the dollar to a weighted average of a basket of foreign currencies that includes the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Of these currencies, the euro has by far the largest weighting in the basket at approximately 57.6%. For this reason, concerns about Dubai, Greece and Spain have not only significantly weakened the euro, but because of the euro’s weighting, have had a strong bullish effect on the dollar index.

The chart below shows that the 79 level in the dollar index represents resistance in the form of converging 39 and 100 week moving averages. On startling feature in the chart is the 100 week moving average, which has held steadfast in the high 78s for 16 straight months, even as the dollar index has fluctuated wildly during the financial crisis. Should the dollar close above 79 and take out both moving averages, I would have to consider it back on a bullish trajectory. For now, however, I am content to count the recent move as a technical bounce that has resulted from a series of threats to the European economy and its currency.

For more on related subjects, readers are encouraged to check out:

[source: StockCharts]

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