DXY Shows Signs of Weakness as Evening Star Hints at a Reversal

News

  • The Evening Star pattern signals that DXY may be losing its bullish trend.
  • RSI is weakening, which could lead to a drop in the 98-100 range soon.
  • A weaker DXY could help push crypto and stocks higher if the trend continues.

The U.S. Dollar Index (DXY) has shown the first signs of trend reversal, projecting with the appearance of an Evening Star pattern on the monthly chart. Currently, the rate at which DXY is trading is 256.017, slightly down -1.64% month-on-month, after peaking at 93.000.

This design of the Evening Star, which is a typical bearish reversal shape, implies that the dollar may be reaching its peak and points to the possibility of risk assets, such as equities and cryptocurrencies, becoming energized. Analyst Charting Guy (@ChartingGuy) points out that DXY structures are weak, and momentum indicators are all about confirming a decline in strength during the rally.

Technical Breakdown: Evening Star and RSI Trends

The Evening Star pattern is a three-candle formation that typically signals the end of an uptrend. The chart shows a strong bullish candle, followed by a small-bodied candle, and finally a sharp bearish candle, indicating that bullish momentum is fading. This structure historically precedes major corrections in the dollar.

Adding to the bearish case, the Relative Strength Index (RSI), which tracks momentum, has broken below a key level, signaling weakness in the DXY uptrend. A closer look at the RSI shows that it had previously entered overbought territory, but now it is rolling over, mirroring past instances when DXY retraced sharply after a peak. If history repeats, the dollar could be looking at a downward move toward the 98-100 range in the coming months.

Impact on Risk Assets: Crypto and Stocks to Benefit?

The lower dollar over time, according to the analyst, results in bullish environment for risk assets, including Bitcoin, stocks, and commodities. Whenever the DXY declines, global liquidity begins to flow into higher-risk markets, which fuels the rally of stocks and crypto. This dovetails into the historical precedent of DXY downturns, where Bitcoin and tech stocks experienced strong price surges.

In the scenario that DXY fails to recover the level of 108, it could ultimately confirm the mid-term downtrend and thus open the gateway into further erosion towards the 100 range mark. All eyes are on any break below the 105 thresholds, confirming that the move to the lower territory will be sustained. If not, returning above 108 could invalidate the bearish set-up and point toward yet another leg higher.

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