The U.S. Dollar's Range is Broken, 82 Level Still Looms

The 82.00 level in the U.S. Dollar Index should not be underestimated. It's a very slippery slope north of 81.80 to the psychological 82.00.

The follow through on the U.S. Dollar correlated pairs has been weak because of the range bound U.S. Dollar. I think sometimes we forget what support and resistance really means. We draw all our lines and levels and then think our job is done. In reality though it has just begun. Each line and level is a "decision level". We as traders must decide what each price means and what the reaction is most likely to be.

If I see prices heading lower, approaching a support level, I will expect prices to bounce off it until it breaks. The opposite goes for resistance. Expect it will hold -- until it doesn't. This chart of the U.S. Dollar Index futures shows the point very well.

There are very distinct levels that the U.S. Dollar that prices reacted to. The support levels of 81.25 to 81.27 and the resistance levels of 81.70 to 81.72 are currently containing price action. Until prices break the support or resistance I will expect prices to continue to bounce within these levels.

So let me address some mechanics to these levels.

There are two types of support/resistance levels: soft and solid. Soft levels have a large variance. "Variance" is the difference in price between the touchpoints that make up the level. For example, the support level has a variance of two pips (81.27 - 81.25 = 2) Soft levels typically have a variance of greater than five pips while solid levels are under five pips. I say typically because each market has varying spreads which can contribute to wider acceptable variance. For the most part though, five pips while cover the major pairs. If you need greater than five pips that means that you are probably looking at a more obscure cross rate.

The levels on the U.S. Dollar are invaluable. I have always said that the U.S. Dollar Index is a secondary confirmation and it still remains so. Today's levels also shed light on the potential follow-through of the U.S. Dollar-correlated pairs. The 30 minute EUR/USD was showing a potential breakout higher. This was a great looking set up however with the 30 minute U.S. Dollar trading near what was a double bottom at the time, there was a higher chance that prices would bounce off support rather then trade lower. This was even more the case since the double bottom was also a 30 day low. Monthly and yearly highs and lows are key levels.

Pushing the boundaries of the chart means that we must identify these support and resistance boundaries before assuming a trend will persist or that a trend will even begin.

Raghee Horner is a trader and money manager. She is the author of two books, "Forex Trading for Maximum Profit" and "Thirty Days of Forex Trading", published by Wiley and Sons. Raghee's charts are created using eSignal and EZ2 Trade Software www.ez2tradesoftware.com