Last week we examined how the US Dollar compared to some of the other major western-world currencies, the Canadian, Euro and GB Pound. My conclusions on each were similar, from a technical perspective we’re seeing sideways consolidation, with a hint at further dollar rises against Europe, and perhaps decline against the Looney. Realistically the USD has had a fantastic run against other major currencies over the past couple of years. One of it’s most aggressive moves has been against the Japanese Yen, even though I didn’t use it as a comparative example. The explosive inflation and desperation of Abenomics over the years tells it’s own story, and perhaps I’ll approach that topic on a later date, but for the sake this article, the 3 I’ve looked at suffice. To catch up, see my previous articles.
Now let’s take a step back and look at the US Dollar index DXY, or “Dixie” for the general trend. The order of operations for any market move goes (1)consolidation (2)breakout (3)retest (4)movement. Each of the above pairs are somewhere in the consolidation and breakout phases. This offers the best opportunity to traders, but can cause frustration to the buy-and-hold investors who would prefer the market pick a direction and go with it.
Shifting away from the specific pairs, let’s check out the Dixie, or DXY on your trading software. The Dixie is forming a falling-wedge pattern, setting lower highs, but holding onto a stable base.
Before I am willing to take any position, especially in the currency markets, I try to convince myself of both arguments, and then choose which one is most appropriate. I have the privilege of being part of a fantastic trading group, comprised of well-studied individuals from around the US, Europe, South Africa and Asia. In our group we have have noticed a number of repetitive pricing patterns which populate charts regularly, and we look for these events to play out. We also recognize that all markets are subject to the most basic principles of supply and demand. We presuppose that regardless of what indicators, tricks and voodoo you employ, supply and demand is the ultimate decision-maker. If carbon is required for life to exist, then you might as well call s/d the carbon of markets, they can’t exist without it.
So if step (1) for me is seeking out pricing patterns that are familiar, and step (2) is employing supply and demand, then step (3) is trying to determine what institutions like banks, government entities and the large brokerage houses are doing. Often times a directional wedge pattern is simply institutional trading clearing out the riff raff. Small traders take small positions on small time frames. If you’re placing large positions, you prefer no one standing in your way. In the case of the above chart, the descending wedge into support “could” be large institutions buying up SELL orders that exist in the consolidation zone, choosing to lose small amounts of money, with the ultimate goal of switching positions to massive BUY orders, with no one standing in their way when the dust settles. However, this particular wedge is consolidating down while the trend is up. There is no reason to clear out orders in the direction of the trend, those smaller trades would just push your large institutional trade much higher. Directional wedges can often mean as much continuation as they do reversal, so I tend to ignore them unless they are against the trend, which would look opposite of what we have here.
Next I’d look at the supply/demand levels specifically. I’ve placed a dashed line showing the support level on this consolidation. We’ve had 2 touches thus far, neither able to provide an HH (higher high), hence the wedge. So if we’re ignoring the previously mentioned institutional wipe-out of conflicting orders (as they shouldn’t exist along with the trend), then more likely we should address the bulls vs. bears in general. On the 2nd touch of the support line, the bulls failed to hold the bears as the price did engulf (moved just below support before returning up, see circled spot indicated on the chart). This was a brief, single-day break, but still worth noticing. These can signal a fake-out, which is usually a point that larger institutions will allow a price to drop to in order to buy up stop losses just below the support level. On the other hand, this can signal weakness in the bulls. If the major institutions are not involved in this consolidation as I assumed above, without their leverage it just becomes about who believes their story more. This chart says the bears are pushing harder. A major breach in the support line should see a number of bullish stops hit, and traders may change their positions.
Finally I’ll address the moving averages. Price has sat well above the 200 day moving average for a while, but the consolidation is allowing for catch-up. The shorter 50 day moving average is descending with the wedge, as expected.
So if I were a betting man, where would I put my money today? Well, I’d leave it in cash. In my order of operations above I listed consolidation, breakout, retest and finally movement. The third phase, retest, is always the safest bet. Given the consolidation in the specific pairs (which are slightly hinting at higher USD values) as well as the Dixie (which, at this time argues for decreasing USD values, albeit I’d argue only momentarily), my US Dollar play today for the longer-term investment is a resounding “do nothing,” with bated-breath anticipation of course. My focus will be on supply and demand levels, potential breakouts, MACD and the 200 day moving average to offer signal, or I might get lucky and see an RSI momentum shift, or even better, divergence, hinting at the ultimate direction. In the meantime, I forgo taking an investment position, and look for intermediate and day trading opportunities on the specific pairs.
When all else fails, zoom out. Look at the weekly chart below. While the US Dollar has made a pretty significant leap up over the past couple years, comparing to the Dixie levels of the past, there is still a lot of room to grow. Although we do have a 40 year long descending wedge pattern, but that’s a conversation better saved for a geopolitical or monetary policy discussion.
Over the last near-50 years, we’re no where near some of the spikes seen in the early 1980’s or even early 2000’s. So the top-end targets for the Dollar could be higher up, and further down the road. If that’s the case, I’d consider the 108.50 range to be strong support. Also, let’s consider Fibonacci. The concept of Fib correction will always be my personal white-whale. I know how to use them… but why? I will always wonder if market Fib corrections exist naturally like they do in seashells or pine cones, or if they exist because people choose to believe they do. Whether Emperor Fib has his clothes on or not, see the chart below.
Fairly attractive shallow Fib correction has already bounced, should we see a continuation down, there is a nice lineup which I’ve marked on the chart. I call this a first engulfing FTR to trend continuation… I know, it needs a better name and it only makes sense to me and a handful of other traders who use similar jargon. What matters though is that I’m a huge fan of the first supply or demand level into a breakout, which is an easier way to say the same thing. The 0.618 fib level sitting just above it is just confirmation. Should we see the Dixie post another lower low, I’ll be looking for a retest opportunity to get short, and that little point I marked is my ultimate target take-profit and where I’d consider switching to a long position.
Technicals Be Damned…
Idle hands are the Devils playground, and the Devil wants you to blow up your trading account. So while I wait impatiently, thumbs a twittlin’, anticipating a retest entry point following a breakout, I encourage myself and others to put those hands to work checking pending geopolitical and economic news. The USD has its hurdles pending this fall. Fed Governor Powell stated this week that a rate hike was 50/50 for September (although I’d bet against it), the IMF pending Annual Meeting in Lima, the Senate recently passing the Trans Pacific Partnership, and the greater pressure put on the Euro through Grexit talks adds fuel to the US Dollar fire. A wise man told me recently (if you’re reading, and you might be, you know who you are and thank you for the suggestion) that we’re coming into a lot of geopolitical news over the next 6 to 12 months, and it may be worth taking a step away from the technical trenches, head back to base-camp for a bit, and look at the geopolitical map. I’m going to try and do a little more of that on a more regular basis.
Conclusion Rant – A Different Dixie
I wrote this next part, and was tempted to just delete it, as it being a sensitive issue, I fear that the point I am trying to make will be lost once you realize the topic I am using as example, and how emotional and opinionated we can become. I only ask that you try to put your emotional bias on hold.
Scattered throughout the usual onslaught of graduation and baby pics amidst my Facebook feed this week has been a fair bit of news regarding the Confederate Flag, or more accurately Confederate Battle Flag. As part of the emotional backlash to the horrific shooting in South Carolina, many are calling for the removal of the Confederate Battle Flag from public and private establishments, arguing it continues to encourage racism in the melting-pot country we live in. My heart goes out to the families and community involved, this is paramount. Having spent a considerable portion of my impressionable youth in the Carolinas, I have my own opinions on the issue of the Confederate Flag… frankly we all do.
I will say that sometimes the pain and frustration can be so great that anything related to it becomes a target. Musicians like Marilyn Manson or Eminem, firearms in general, or in this case a piece of red fabric with stars across it. The meaning of the Confederate Battle Flag has changed, and I would argue that most do see it as a symbol of racism today, whether that is intended, or even accurate, I’ll leave that to you. The Bible gives an interesting hyperbolic answer to this question, “if your arm offends your brother, cut it off.” Personally to me, it’s that simple. The flag means nothing to me as a White boy, and is offensive to my Black friends, so I don’t exactly have a Dukes of Hazzard car in my driveway. But that’s my opinion on the issue, and I hold true to the belief that if you disagree with me, you should be allowed to do so (and should be accepting of any consequences that follow).
I applaud companies like Walmart who have independently elected to remove it from their shelves, not because I agree or disagree with that particular decision, but more with their right as a private company to make that decision by their own choosing. Had they chosen to continue selling them, that also would have equally been their right to do so. As a consumer it’s my right to choose to do business with them or not. But that’s my capitalistic libertarian bias.
Moving from the private to the public sector, should South Carolina choose to remove the flags from public buildings? That should be brought to the polls, as this is less an issue of “freedom of speech” as it is governmental representation. How this plays out should be mildly interesting, but the reality is this is nothing more than redirected rage and frustration. In a fantasy world where a Confederate Flag never flies again on any public or private building anywhere in the United States, I strongly doubt it would have any impact on racism in our country. Instead of focusing on what should be removed, our energy would be better served thinking about what could be added. Unfortunately, until we as a people start treating teachers with the same respect, nay worship as rock stars and professional athletes, I just don’t see an emphasis moving towards educating bigotry out of our civilization.
Regardless, the focus should be on rebuilding and supporting the community affected by this tragedy, not a fabric scapegoat, and perhaps the media outlets are to blame for this diversion of attention.
On a side note, and by no means intending to diminish the severity of the loss of life or the outcry against it, I find it interesting that a simple Google search today using the words “confederate flag” yielrds a few thousand posts all put out in the last, lets say 7 days. Did you know the Trans Pacific Partnership passed through the Senate this week? Go do a Google search for that, you’ll find 2 paragraphs on CNN, and that’s about it.
It’s difficult for me to use this as an example, lets be honest, most people out there are probably angry at the last few paragraphs, “how dare I try to divert attention from this major social atrocity.” All I’m saying is a good politician never misses the opportunity of a good crisis, even if it’s just to draw attention away from other important issues. I would certainly be less combative if the general social-media banter actually had to do with the tragedy, but it’s all about a stupid flag.
On a comparable note, apparently President Obama used the word nigger in a podcast discussing recent events. My point here is that I’ve yet to find a transcript or discussion about what he actually said, but there’s a hell of a lot of commentary discussing his use of one single word. Per our culture, he’s allowed to say it, so what’s the big deal? I’m far more interested in finding out about his plans to educate future generations further away from racism, sexism, bigotry and unwarranted hatred based on thing we did not choose, and cannot change. I’d like to emphasize the word “educate” in the last sentence. Education requires the accurate telling of both sides, and teaching people to make the right decision, instead of forcing it upon them.
We’ve become a culture more interested in tabloid soundbites than the meat of discussion…
…sorry for the rant. Hope you all have a good day, until next time.