Turned bearish (2011-10-11 DXY analysis)

Following Germany and France's assurance on bank recapitalization in an attempt to save the EU countries from going bankrupt, European market and US markets spiked. S&P500 closed at 3.41% above previous close.

Most likely Hang Seng Index would follow the surge as well. As mentioned yesterday, 18,000 is a pretty strong resistant to HSI. So be aware of this level.

So let's see how US Dollar is doing after the announcement from Europe.
















Above is the 4-hour chart of US Dollar Index (.DXY). As you all know, the heaviest component in this index is Euros. Then it would be Japanese Yen and Sterling.

We can see that the index rose gradually since early September. This means that US Dollar was strengthening at that time, most likely because of the concerns towards European debt problems which pulled down the Euros as well as the pounds.

But starting in early October, the index appeared to have topped and started to fall. But it was still within the red upward trending channel.

The news announced did successfully cause a huge movement in the index. DXY finally broke the channel few candlesticks ago, which was due to strengthening of Euros.

It is obvious that if the "concerns" about Europe debt problems are eased, then more people are confident on buying bonds and longer-term debts from the government, and that EUR would strengthen. This is therefore the reason why DXY falls below the support.

Using the low in late August and the high in this month, we can draw a fibonacci retracement. Interestingly, the previous plummet of DXY stopped at around the 38.2% retracement level. So I believe that the index would do a slight rebound.

The rebound would be stopped at around 78, when the index meets its 10-day Simple Moving Average. Then the index probably slumps again, and reaches the next retracement level which is the support: 76.7.

So the whole trend of DXY turns to be bearish now, which means that US Dollar would probably be weakening. However, one question pops out: given the negative correlation between Dollar and Hang Seng Index, if I suggest that DXY is going to fall, HSI should be ready to rocket. So today's analysis on DXY made me review my analysis on HSI again to check whether I have made something wrong. But somehow I still don't have much idea up till now.

Therefore, I think we should spend 1-2 more days to observe any special movements, such as break out of the previous Pitchfork on HSI daily chart and so on.

Good luck.