In order for the U.S. Dollar Index to rally, several currency futures markets have to weaken. One of these markets is the Nearby Monthly Swiss Franc. Based on the longer-term range of .8618 to 1.4216, a retracement zone has been established at 1.1417 to 1.0756. After bottoming at 1.0441 in January, this futures contract quickly rallied to 1.1210, establishing its 2012 trading range.
Since February, this market has found support at the lower or Fibonacci retracement level of this trading range at 1.0756. A failure to hold this price level could encourage additional selling pressure that may trigger a break into the low for the year at 1.0441. This action would help drive up the U.S. Dollar Index.
A break below key support in the Nearby Monthly Euro futures market will also trigger an upside response in the U.S. Dollar Index. This futures contract bottomed at 1.2637 in January and topped in February at 1.3498. Since then it has traded inside of a range while straddling a 50 percent price level at 1.3068. Holding this price is giving the Euro a slight upside bias, but a break under it would be a sign a weakness.
The first downside target is the cluster of Gann angles and the Fibonacci level. The combination of the horizontal price level at 1.2966 and the uptrending Gann angle at 1.2957 may prove to be either an important support zone or a breakout point.
With key support established near the 1.3000 level, a break through this price will likely mean a major shift in investor sentiment. This could trigger a further decline into 1.2966 to 1.2957. If this price area fails then traders should look for an acceleration to the downside. This action should trigger a quick rally in the U.S. Dollar Index.
Since it is early in the month, traders have plenty of time to monitor both the Swiss Franc and Euro to see if the scenarios described develop. Traders should overlay these key monthly levels on the daily chart to see how they interact with the short-term time frame. It is easy to get caught spending too much time trying to figure out the shorter-term price moves when it is actually the longer-term chart dictating the support and resistance and changes in trend.
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