Technically Speaking

US Dollar Index -- Head and Shoulders Pattern?

Dana Mantini
By  Dana Mantini , Senior Market Analyst
The chart above is a daily chart of the December Dollar Index futures showing the potential head and shoulders chart formation. (DTN ProphetX chart)

U.S. DOLLAR INDEX:

The U.S. Dollar Index of late has been a mixed affair -- up one or two weeks and down the next. Typically, traders will look at the U.S. Dollar Index --- the value of the U.S. dollar as it relates to a basket of foreign currencies --- as a way of measuring its impact on agricultural commodities and exports. The active futures month for the index is currently December. The current chart for the Dec U.S. Dollar Index futures may be forming a "head and shoulders" chart pattern. What are the ramifications on a breakout?

The head and shoulders pattern can generally be one of two things: 1) a continuation pattern in the ongoing trend (which has been up), or 2) a bearish reversal pattern. In the first case, a break and close above the head, or recent high, at 93.71 would likely mean an extension of the rally, and higher prices ahead, which would be a bearish headwind for ag commodities. In the second case, it would be a bearish reversal pattern. However, in that case, it would require a solid break and close somewhere under 92. A sharp fall in the U.S. Dollar Index would be bullish for U.S. commodities. One thing possibly working in favor of the bearish resolution would be the Federal Reserve decision to raise interest rates sooner than expected to counter ongoing strong inflation trends, likely putting upward pressure on the dollar. The jury is still out on the Fed's next move.

NOVEMBER SOYBEAN FUTURES:

For the past 14 days, we have seen November beans trade within a range of effectively $12.60 to $13.10, never really closing above $13 or below $12.60. There are diverging fundamental factors at work. The bulk of the harvest and possible harvest pressure lies ahead, while the advantage that the U.S. has on soybeans compared to Brazil makes large Chinese purchases very likely in the weeks ahead. The internal price of soybeans in China at the Dalian futures exchange hit another new high at over $19.73 per bushel on Friday.

China markets are closed on Monday and Tuesday for a holiday, but one would expect to see China back buying by midweek. China has bought 264,000 metric tons (9.7 million bushels) in the past two trading days.

Watch for a closing price over $13 or under $12.60 to dictate the next move in the soybean market in the coming days. On a break, we should see $12 to $12.20 as the next support.

MINNEAPOLIS DEC WHEAT FUTURES:

For the past three months, Minneapolis December wheat futures have been trading in a sideways, wide range of $8.60 to $9.30 or so, with only a few exceptions. The chart pattern looks to be an ascending triangle chart pattern, bounded by those extremes. Typically, this type of pattern is a continuation pattern in an ongoing trend. With the drought-affected spring wheat crop production falling just as world wheat fundamentals have turned decidedly more bullish, one would have to expect a breakout to the upside, but Minneapolis has been under some pressure lately.

Keep an eye on Minneapolis December for a move one way or the other out of this sideways to higher chart formation. Above $9.30 would be bullish, and a break under $8.60 bearish. That will likely dictate the next move for spring wheat futures. So far, momentum indicators give us no hint as to which way that breakout may occur.

Comments above are for educational purposes and are not meant to be specific trade recommendations. The buying and selling of grain and soybean futures involve substantial risk and are not suitable for everyone.

Dana Mantini can be reached at Dana.Mantini@DTN.com

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