Flickering signs that the trend may be changing

• The US dollar index is showing signs that it could turn the tide and move higher.
• The weekly and daily charts show bullish Japanese candlestick patterns after the recent support at 100.
• The 4-hour chart shows the formation of a possible new short-term uptrend.

The US Dollar Index (DXY) has bounced back to support at the edge of its multi-year range and has formed some reversal patterns that point to the possibility of it reversing the bearish move from the July highs. Overall, though, it’s still a little too early to say for sure, and the risk remains that the bears will once again take the reins and push the price back down.

US Dollar Index Weekly Chart

DXY has formed an unconfirmed rising Piercing Line Japanese candlestick pattern (shaded rectangle) on the weekly chart at a historical support level in the 100s. This level has been tested several times in the past (orange bubbles).

The Piercing Line pattern is formed after a downward move when a red candlestick is followed by a green candlestick that closes above the midpoint of the initial red candle. It is a sign of a bullish reversal. For confirmation, however, the pattern should be followed by another green candlestick that cannot be verified until the end of the current week.

The Relative Strength Index (RSI) momentum indicator broke out of oversold last week, providing a buy signal and adding further evidence that a bullish recovery may be developing.

Daily chart of the dollar index

The DXY daily chart shows that a Japanese Three White Soldier candlestick pattern has formed during the recovery over the past three days. Such a pattern is formed after a market bottom when three rising green candlesticks form in a row that have a similar size. It is an optimistic reversal sign.

The momentum oscillator of the Moving Average Convergence Divergence (MACD) has crossed above its red signal line, providing more evidence for the bullish hypothesis.

The RSI has also recently broken out of oversold, providing a buy signal.

4-hour chart of the dollar index

The 4-hour chart of DXY shows the possible formation of a new uptrend (shaded box). The sequence of highs and lows is now rising, suggesting that the short-term trend may be bullish. The DXY also breached the key August 22 high.

Given that “the trend is your friend”, this could indicate the development of higher highs, with the next target at the 102.26 level (August 14 low).

However, the RSI has just broken out of overbought, raising the risk of a deeper pullback unfolding.