From the Desk of Ian Culley @IanCulley
“Can’t Stop, Won’t Stop” blared the cover of Bloomberg Businessweek less than a week after the US Dollar Index $DXY peaked last September.
Unbelievable timing.
We can’t make this stuff up!
While the DXY has undergone a significant correction since, the message is just as appropriate today as it was then.
The dollar can’t stop.
It’s ripping higher this morning, breaking to fresh six-month highs as it nears a key area of former resistance.
Those mounting breakouts and breakdowns favoring the USD from mid-August are sticking their moves.
Have no fear, or "FOMO," if you missed any of those trades.
These next two dollar pairs offer well-defined entries using one of my favorite short-duration chart patterns…
The flag.
Before I outline the trade setups, here’s a quick reminder of what constitutes a flag or pennant (triangular version), according to Robert D. Edwards and John Magee’s classic Technical Analysis of Stock Trends:
- a short consolidation no longer than 3-4 weeks in duration;
- continuation in nature – price resolves in the direction of the preceding trend;
- often fly at half-mast, marking the midpoint of a vertical run.
These observations were made more than a hundred years ago. Yet they remain just as applicable today as the base human behavior driving price, and the formation of classical chart patterns has not changed.
Check out the New Zealand dollar $NZDUSD:
The kiwi fell 500 pips over the course of four weeks. (That’s “vertical” enough for me.)
After bottoming last month, price consolidated for slightly more than two weeks as the NZD/USD pulled back to the May pivot lows.
Notice this flag tilts upward in the opposite direction of the trend – a classic feature of these short-duration continuation patterns.
I’m short the NZD/USD pair on today’s breakdown, monitoring a close below 0.5880 for confirmation. As long as the NZD/USD trades below that level, my target is approximately 0.5550.
I gauge this target by applying the distance of the preceding leg to the peak of the flag and extending lower.
Measuring the downside objective involves more art than science. But it’s rooted in the tendency for steep price movements to pause halfway.
Therefore, the leg-out of the flag should mirror the leg-in in magnitude and duration. So, if this is a valid flag, the kiwi should reach our measured target by the end of the month.
The Australian dollar $AUDUSD is flashing a similar sell signal this morning:
A three-week flag formed just beneath a key polarity zone at roughly .6525.
I like the AUD/USD short below that critical zone. I’m willing to add an additional layer to my current position on a daily close below 0.6400, targeting a measured move to 0.6050.
I expect buying pressure to increase if and when the aussie reaches last year’s low of 0.6170. Regardless, my measured target stands, albeit a potential speed bump rests at those former lows.
I never hesitate to trade a good-looking flag or pennant, as I’m short both these dollar pairs as of this writing.
US equity indexes will likely struggle if these trades reach their targets. But not all risk assets or stocks will fall against increasing USD headwinds.
Commodities have disregarded dollar strength since the DXY began to rally in May 2021. As for energy, it has its problems – but the dollar ain’t one.
So, the dollar won’t stop. It can’t stop!
But don’t worry. There will still be plenty of trading opportunities in the coming months, whether you trade forex, futures, or stocks.
Stay tuned!
Thanks for reading.
Let me know what you think. I love hearing from you!
And be sure to download this week’s Currency Report!
