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Why Bears May Want to Be Cautious on the Dollar Index Breakdown

As has consistently been the case over the last couple of years, Friday’s US-China trade “breakthrough” may be less than initially meets the eye. While President Trump praised the agreement as a “love fest” between the US and China, Chinese press was more levelheaded, noting that nothing has even been signed yet.

At the end of the day, cooperation that allows China to buy more US agricultural goods (given the country’s food shortage) and the US to delay tariff escalation benefits both sides, but more contentious issues surrounding intellectual property and forced technology transfers could still torpedo a more comprehensive agreement in the coming months.

In any event, Friday’s risk-on trading session prompted traders to sell the greenback, prompting the US dollar index to break down from its four-month rising wedge pattern. Despite the seemingly bullish name, this price action pattern shows that buyers are struggling to push the price higher on each subsequent swing. It is a classic sign of waning buying pressure and often portends a bearish reversal:

Source: Trading View, City Index

While the price pattern itself is potentially bearish, readers may want to exercise some caution. For the momentum, the dollar index remains in a textbook uptrend (higher highs and higher lows) and neither the RSI nor MACD indicators have broken down from their recent bullish ranges.

For bears to truly feel comfortable pushing the greenback lower, they’d need to see the dollar index break below its September lows in the 97.90-98.00 range (the equivalent zone in EUR/USD is around 1.1090-1.1100). Unless or until we get a stronger technical signal, traders may want to keep a neutral outlook toward the US dollar generally, despite last week’s breakdown.

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