CNBC's Fast Money: Scary Chart: Bottom About to Fall Out of the Dollar? - CNBC

The Dollar Index, a trade-weighted benchmark of the greenback versus six other currencies, put in significant bottoms in early 2008, late 2009 and late 2010, forming a rock solid trend line that are exactly the kind of support that chart analysts look for in a bullish security.

But after a violent move lower this year, the index is threatening to break that trend line at the 76.20 on the index, alarming technical analysts everywhere.

A daily close below $76.20 “would signal a significant shift in sentiment is underway from bullish to bearish,” said George Davis, Chief technical Analyst at RBC Dominion Securities, in a special report to clients Monday. “This development would also produce a bearish medium to long-term trend reversal for the DXY [DXY Unavailable () ].”

The PowerShares DB U.S. Dollar Index Fund [UUP 21.96 0.025 (+0.11%) ], the ETF that tracks the index, uses futures to pit the dollar against the euro (largest component at 57.6 percent), the Japanese yen (13.6 percent), the British Pound (11.9 percent), the Canadian dollar (9.1 percent), the Swedish krona (4.2 percent) and the Swiss franc (3.6 percent).

The dollar is “hovering just above well-defined lows and toying with the prospects of a break below said lows,” wrote Carter Worth, Chief Market Technician at Oppenheimer Asset Management, in a note Monday. “Not good. SELL.”

So the technical analysts, who make buying and selling decisions based mostly on price movements, have trading floors thoroughly spooked. But what are the charts telling us about the fundamentals?

Last week, Federal Reserve Chairman Ben Bernanke reiterated his commitment to buying $600 billion in Treasurys to effectively keep the benchmark U.S. interest rate in essentially NEGATIVE territory.

That same week, European Central Bank President Jean-Claude Trichet shocked the market by saying a rate increase was possible next month. The Euro [EUR=X 1.3966 -0.0002 (-0.01%) ] hit a 4-month high versus the dollar today.

“Bernanke's testimony last week clinched the continued decline in the US dollar at the same time Trichet expressed what it means to be a prudent central banker,” said Peter Boockvar, equity strategist at Miller Tabak.

Boockvar and others believe that Bernanke is making the mistake of focusing on core inflation, which excludes food and energy costs because they historically have been very volatile. But at this moment in time, commodities have not been volatile, they’ve gone straight up. Brent crude oil crossed above $106 and silver hit a 30-year high on Monday. The ECB’s consumer price index comes out next week.

Interest rates determine currency fluctuations, as investment will flow into the countries with the highest rates of return. That reality has awakened some in Bernanke’s own circle. Dallas Fed President Richard Fisher Monday was among the most recent policy officials to signal that a completion of Bernanke’s full quantitative easing program may not be necessary.

The other reasons traders are fundamentally bearish on the dollar is its failure to act as a safe haven during the uprisings in the Middle East and North Africa. The DB PowerShares ETF (UUP) is down 2 percent over the last month as the events in Tunisia, Egypt and Libya began to unfold.

“The dollar not asserting itself during a period of turmoil in the Middle East is hugely worrisome,” said Scott Nations, President of NationsShares, a division of Fortress Trading. “Europe is going to raise rates before we do and China is already there. Both are bearish for the dollar. I'm watching this 22 level in the dollar ETF.”

Hedge funds are betting collectively against the dollar with the fervor of their currency trading legend George Soros. Figures from the CME, first reported by the Financial Times today, show that there is $39 billion net short the dollar, above the previous record of $36 billion in 2007 on the precipice of the financial crisis.

“We expect a bounce against our short position, but have no intention of making any adjustment on the first bounce as we believe there is significant downside potential in the dollar from current levels,” said Adam Grimes, director of tactical investments at Waverly Advisors, which sells its research to hedge funds. “In light of Trichet’s comments, expectations for a subsequent rate hike are now starting to get baked into the market.”

To be sure, several brave traders are using this level to get back into the dollar in a bet that it will continue to hold the line. They believe the ECB will raise rates too early, derailing their fragile recovery and causing a flight back to the safety of the dollar. And even some bears on the dollar don’t see what’s so scary about a falling currency.

“Why is a weak dollar so bad?” asks Michael Block, Chief Equities Strategist at Phoenix Partners Group. “It is a great boost for manufacturing and could be a great boost for U.S. industrials” selling their products overseas at cheaper prices.

The problem, this time, is that a plunging dollar could throw fuel on the rally in commodities priced in dollars. This will aggressively raise input costs for companies from General Mills [GIS 36.79 0.03 (+0.08%) ] to Walmart [WMT 52.02 -0.05 (-0.1%) ], hit U.S. consumers with higher gasoline prices and cause more social unrest in even more parts of the world.

“The dollar will plunge against most other currencies, which will send prices increasing at a much faster rate than what has been experienced recently,” said Peter Schiff, President of Euro Pacific Capital. “So if you think oil and food prices are rising fast now, you haven't seen anything yet.”