Chart of the week: US Dollar Index forms potentially bearish chart pattern

The US Dollar has formed a potentially bearish chart pattern which could send the greenback considerably lower, something which would provide a significant boost to stocks, commodities and precious metals.

As the chart below shows, having declined from 84.10 in late July, to 78.60 in mid September 2012, the US dollar, as measured by the US Dollar Index, then retraced almost exactly 50% of the decline (red arrows). Since then however, the dollar has formed a potentially bearish chart pattern known as a descending triangle pattern.

As Investopedia.com explains, “The descending triangle is the opposite of the ascending triangle in that it gives a bearish signal to chartists, suggesting that the price will trend downward upon completion of the pattern.

A 9 month chart of the US Dollar Index (Click on the chart for a larger version)

A 9 month chart of the US Dollar Index (Click on the chart for a larger version)

Source: Chart courtesy of stockcharts.com

Note: The US Dollar Index measures the value of the US dollar relative to a basket of foreign currencies, including the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc. However the index is heavily weighted towards the Euro (some 57.6%) and is therefore greatly influenced by events in the Eurozone.

If the dollar breaks out of the pattern to the downside, as per the purple arrows, the greenback could quickly fall to around 76.30, a level last seen in October 2011. And since all commodities and precious metals are denominated in US dollars, a fall in the dollar would likely provide these assets with a significant boost, and the same is true for US stocks.

Of course it is also possible that the dollar continues to bounce around inside the pattern for a few more months, or that it breaks out of the pattern to the upside.

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