From the Desk of Ian Culley @IanCulley
Sometimes you have to go back to the basics.
One simple concept has served me well over the years: Don’t fight the primary trend.
There are many other best practices I use to maintain my sanity regardless of underlying market conditions. But sticking with the underlying trend is fundamental to any trader’s success.
As Charles Dow established more than a hundred years ago, trends persist! This concept is one of the key Dow Theory tenets and forms the foundation of any trend-following strategy.
It’s our job as technicians, traders, and investors to identify the primary trend and ride it as long as possible.
And it’s difficult to imagine a stronger trend in 2022 than the rising dollar.
Here’s a daily chart of the US Dollar Index $DXY:
The dollar has been trending higher for more than a year as the 14-day RSI continues to hold within a bullish regime. Any weakness has been short-lived and followed by fresh legs to the upside.
Price action continues to work through bearish divergences, and each dip has provided new buying opportunities for dollar bulls.
If you want to get cute and fight this trend, tread lightly.
When it comes to currency markets outside the US, the British pound is testing a key level at the 2020 lows:
Throw in the bullish momentum divergence on the weekly chart and its lowest print since 1985 last week, and this has “mean reversion” written all over it!
We tried buying a rebound in the pound recently. It didn’t work.
That doesn’t mean it can’t. And it doesn’t mean the pound won’t eventually catch higher against the dollar. I’m sure it will (eventually).
This is simply not a bet I want to make right now, given the underlying uptrend in the dollar.
Check out the daily chart of the EUR/USD. This is the opposite of a primary uptrend.
Do you really want to buy this chart?
The euro is exhibiting a textbook downtrend as it stair-steps lower within a bearish momentum regime.
If anything, I want to fade strength and sell weakness when I see this chart. As long as that’s the case, stocks will struggle.
Of course, there will always be areas of the stock market that will reward you for stepping in and buying. Those are the pockets of strength we want to focus on.
I know the idea of following the primary trend might seem elementary – Technical Analysis 101. Consider this a friendly refresher, especially as volatility and the noise of shorter timeframes increase.
Charles Dow made it clear more than a century ago: The trend should be assumed to continue in effect until its reversal has been signaled.
For now, there’s no sign of a trend reversal in the dollar.
Stay tuned!
Thanks for reading.
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Allstarcharts Team