Daily Client Note
Currency and Dollar Index Review
5-Wave DXY Finds Support
The dollar index (DXY) (75.20) battled resistance at 75.90 this week, and in doing so generated a short signal that targeted 75.10 which has now completed its cycle. Support will be found at 75.00 and 74.90, which are areas that will be hard to break if equity markets fail to move S&P 500 valuations through 1290 resistance. Major currencies are in a six-session sideways crawl against the USD.
The mid-term DXY trend has moved from short to neutral, and is allowing a base to form at 74.50 that has proven once again to be a major global market swing point on the dollar. Now will be the time to look to buy the dips that test support on DXY in the near-term at 74.50, and to be prepared to close out at near-term targets, including 76.00 and 76.50.
Trade desk Outlook:
The trade desk has been calling for the building of mid-term long-dollar positions if global equity trade fails to break and hold resistance. At this stage it would seem that dollar valuations hinge on where S&P 500 markets decide to settle. The dollar is not being bought from a desire to be long the US economic growth story; it is being bought as an automated hedge against falling equity valuations.
Clients will be notified via trade signals and market alerts when price action breaks and holds, and sets up the next dollar index and major currency trade signals. Right now, the call is for a consolidation of USD buying that finds support, and to then break higher if S&P 500 futures reverse off the next upside test of 1290.
All attention has focused on the Federal Open Market Committee interest rate statement that will be delivered on Wednesday. The time of announcement has been moved to 12:30 ET, and the 14:15 ET time-slot will now be taken by a FOMC Press Conference. If the last meet-the-press conference is anything to go by, the session will be rigged with pre-determined questions and answers that the local Elementary School debating team could do a better job of facilitating.
Dollar Index 1-Hour Chart:
Reversed off the Apr 18 11 and May 13 11 swing point high, and traded around the 100-day SMA at 76.00 (orange line) resistance, as highlighted last week. No long-term buying signals will form until a weekly chart can close above 76.80. No long-term selling signals will form until a weekly chart can close below 74.50.
In the process of completing a five-wave move that will test the strength of support.
Wave 1 moved from 76.50 to test 75.80.
Wave 2 reversed higher and tested 76.30 and confirmed buying momentum was weak.
Wave 3 made the initial test of support at 75.50 and confirmed a five-wave pattern could test 74.90 if global equity fundamentals aligned.
Wave 4 failed to break 100-day SMA resistance.
Wave 5 now has potential to test 74.80 support.
Call to action:
Near-term 8-hour trades have the most potential to follow through, until the 74.50 and 76.50 channel is broken on a weekly chart close.
Where To Now?
- Dollar Index generated a near-term sell signal from 75.60 on Jun 20 2011, which has not yet signaled to close, targeting 75.20
- Generated a mid-term buy signal on June 09 2011 with a break above 74.50 that targeted 75.90, which completed its cycle
- In a very mixed momentum cycle that will not generate major buying sentiment until a Weekly chart can close above 76.50
- Downside targets will include 74.50 if S&P 500 trade closes a Weekly chart above 1290
- Expect downside tests of 74.50 support to hold steady
- Low-volume ramps are hitting the currency markets in spasms which cannot generate substantial near-term moves
This is a technical and sentiment review that is signaling to buy the dollar index on the downside tests of support.
Support and Resistance:
Strong buying activity was seen at 74.00 on DXY trade in April and May. This reversal support area will be closely monitored now that it has been broken as resistance. Market alerts will be sent to clients if there is a sustainable bounce off 75.40 support.
Previous price action at these dollar index levels have been choppy, overlapping, and very volatile, but have resulted in mid-term USD buying.
Main DXY support: 72.50 and 74.00. Main DXY resistance: 76.50 and 78.00.
Daily trading range on DXY is 60 ticks, which is building in strength and indicates institutional interest in generating a support base. The 50-day Simple Moving Average (NYSE:SMA) on DXY is @ 74.80, the 100-day SMA is at 76.00. DXY price action has a 36-month 75% inverse correlation to crude oil and SPY moves, and an 80% inverse correlation to euro (Eur/Usd) currency moves.
Last three months of potential Forex trade signals have generated sixty trades, forty of which have completed, that covered 1600 pips of overall movement. Any misses have come on days that instant volatility hit the global markets in reaction to breaking news headlines. Most signals have been generated from 1-hour chart algorithms.
Global Forex Order Flows:
It is generally accepted that forex trade will follow, not lead, global market momentum. Price action in global trade at this point in time is very mixed, and favoring consolidation in equity and commodity trade, which may stifle the dollar momentum.
The Bank for International Settlement data below reveals that the forex market will remain contained in tight ranges from 10:00 ET until at least 20:00 ET most days, because of the weak order flows going through the US session. It also reveals why the European futures market open, from around 02:00 ET through until the Chicago reversal at 07:00 ET are the main times to expect sustainable moves. Europe dominates forex flows in the same way that the US dominates bond and equity flows.
U.K. and Euro-zone 53% (01:00 ET-11:00ET). Asia 21%. (18:00 ET-03:00 ET). U.S. 16% (07:00 ET-16:00ET). Other 10%.
Daily Client Note