So dollar…whatcha want to do now?

• ragheehorner
• January 12th, 2010

The U.S. Dollar Index rules most of my day.  I have a a love/hate relationship with the dollar because when I get it right trading feels like the easiest thing I can do…when I get it wrong trading feels like the hardest way to make an easy living.  I’m also seeing that the inverse correlation through most of ’09 where dollar weakness meant equities strength and vice versa seems to have lost it’s step.

A full one-year market lookback view of the U.S. Dollar Index

The overall direction of the 34ema Wave is still up but it’s that little “hitch” — that slight transition that’s begun — that’s got my attention.  This makes all the difference because if the market cycle is still up then I’m buying into the pullback on this chart because it’s a correction.  That means I could look for swing shorts on the EUR/USD daily as it bounces/corrects.  BUT IF THE MARK UP CYCLE ON THE DOLLAR IS TRANSITIONING it s a different story.

It’s no newsflash that the daily chart of the dollar has been pulling back hard.  For the last three sessions it’s been trading inside the Wave.  I would say that this is the first sign since the beginning of December that there is a chance that this market could enter a sideways range-bound cycle.

There’s a lot of news surrounding the move lower and I will confirm any and all it that I may factor into my trades with what price action is reacting to.   Bullish fundamentals must be confirmed by some sort of bullish movement, and same goes for bearish news and bearish movement.  The markets a forward looking, discounting mechanism…and I better know the psychology that’s being baked into the cake.  Notice I said “psychology” and not news because frankly I think it’s pretty tough to darn near impossible to be 100% sure that you 1) are aware of all the news/fundamentals and 2) that I’m certain what’s been discounted and to what degree it has been.  I’m not saying fundamentals aren’t important (they are!) I’m just saying it’s difficult to set up a trade with them alone.

So what are the key levels to watch?  What’s this market going to do next?  Heck if I know for sure – but I can find the decision levels that I’ll need to watch so I can recognize what its intentions are.

Zoomed in view of the dollar with the Fibo Retracement

Currently price action is sandwiched between not only the 34ema Wave but also the 23.6 and 38.2 Fibo levels.  If prices continue to trade in this range, transition into accumulation or distribution is inevitbale and that means the swing set ups on this chart and the daily EUR/USD are out – same goes for the cable for that matter…maybe the USD/JPY but there’s the Dow to think about here as well…but I digress.

Now there’s a lot of nuance on the intraday charts (like a 240 minute mark down cycle) but the end of day is the most psychologically relevant.

– Raghee

Tickers: $EURUSD, $USDX

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