From the Desk of Ian Culley @IanCulley
The US dollar has been under pressure for the past five days, and investors are dancing in the streets.
I get it. A weaker dollar sits at the top of every stock market bull’s wish list. When the dollar goes down, stocks tend to go up. But don’t forget – betting against the dollar has only brought pain this year.
So, instead of joining the celebrations, I nailed down a clear-cut strategy for selling dollar weakness.
Spoiler Alert: Early sell signals are already starting to fire!
Before I outline the levels, here’s a quick update on the US dollar Index $DXY rally and what justifies a significant trend reversal:
At this stage of the advance, two key items capture my attention:
- the bullish momentum regime; and
- the rhythm of the dollar rally.
First, momentum has been in a bullish regime since March of last year. In fact, the daily RSI-14 has barely been below 40 during this time.
Every bearish divergence has resulted in more overbought conditions and a fresh leg higher. That hasn’t changed – yet.
Second, the rhythm of breakouts – followed by a retest of key Fibonacci levels – remains intact. Remember, the throwback below the 2020 highs in May turned out to be a hard retest and bear trap.
It wouldn’t be surprising to witness similar action in the coming weeks.
Rallies don’t get much stronger than the current one in the US Dollar Index. As such, flipping the book short won’t be easy. But, with evidence building against the dollar, we want to be prepared to do just that when the time comes.
To have a high level of conviction about selling dollars, the momentum and the rhythm of the rally have to shift.
Check out the US dollar index futures:
I don’t trade US dollar index futures. If you like trading those contracts, go for it. If I did, I would only be short below the Sept. pivot low near 107.50. That’s the line in the sand.
A resolution below last month’s lows would mark a clear departure from the rhythm of the uptrend. It would also confirm the violation of the year-to-date trendline. That would go a long way in indicating a trend reversal.
You want to see that trendline violation be accompanied by the 14-day RSI registering a reading below 40. A momentum reading below 40 would also be a significant change in character
It’s even better if momentum leads price, breaking below 40 before the DXY undercuts 107.50. Regardless, all bets are off until both of these things are in place.
While dollar index futures are a fine trading vehicle, I prefer to use the individual dollar pairs through the futures or forex spot markets.
For me, it all comes down to the exposure to a single pair. That’s what I want.
I’m also a little partial to the euro. It’s lacked the volatility of the pound and has been one of the most orderly trends this year, providing well-defined risk levels:
The two levels of interest are 0.9905 and 1.0350. The first level marks the September pivot lows, the second a key polarity zone that coincides with a shelf of lows from 2015-17.
On Tuesday, the EUR/USD took out last month’s pivot lows. If you want to nibble on the long side of the EUR/USD, have at it.
But you can only be long above 0.9905. The bias is lower, and downside risks are elevated if the euro fails and falls back below this level.
For the more risk-averse, you can trade against 1.0350. A daily close above that level reclaims former support and puts the euro back within its prior range.
Regardless of entry, the initial target is the May pivot highs around 1.08.
Is getting long the EUR/USD above 0.9905 a little cute?
Sure, but I’ve also laid out clear levels and conditions that would signal a significant reversal in the dollar.
I do not pick tops or bottoms. That’s not my game, and that’s not what this exercise is about.
Pulling money from the markets is my singular goal when placing a trade. It sounds silly, but having the right attitude and mentality is crucial to success.
The legendary Ed Seykota put it well: “Everybody gets what they want out of the market.”
I’m hunting for profits that keep me dancing in the streets.
What are you after?
Thanks for reading.
As always, let us know what you think.
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Allstarcharts Team