The US Dollar Index $DXY is on cruise control with nothing ahead but an open road.
The few obstacles that stood in its way are falling to the wayside. That’s right – the handful of commodity currencies that have refused to roll over during the past six months are beginning to slip.
Before we get to these fresh breakdowns, let’s set the scene with two currencies that have been anything but resilient – the euro and the British pound.
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.
We held our September Monthly Strategy Session Tuesday night. Premium Members can click here to watch the recording and review the chartbook.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends.
This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
We got just a little bit of Dollar weakness starting in mid-July and stocks ripped higher. Thousands of points added to the Dow, Ethereum doubled and the average stock on the Nasdaq rallied over 40%.
We saw one of the most historic short-squeezes in history. And all it took was just a little bit of Dollar weakness. It wasn't even that much.
But then once that Dollar strength came back last month, the bid in stocks and crypto disappeared.
Here's a zoomed out look at the negative correlation between stocks and the Dollar:
Currency markets have provided stellar trading opportunities this year.
It isn't always this way.
Last year was rough. False breakouts and whipsaws were the norm, as most forex pairs and crosses chopped sideways in trendless ranges.
Many of those consolidations have now resolved, as currency markets have begun to trend again. And it’s hard to find a stronger primary trend to bet against than the declining Japanese yen.
We’ve written about the yen multiple times in the past few months, pointing out that The Yen Provides the Base and joking that we could profit by simply buying Anything in Yen.
Today, we’ll follow up by outlining three tactical setups to bet on further yen weakness.
The US dollar Index $DXY is trading at fresh highs. Take a look around the currency market. It shows.
Recent attempts to fade dollar strength have failed. The euro has fallen to its lowest level since late 2002. And we’re beginning to see forex pairs experience fresh breakouts in favor of the USD.
It’s certainly not the best look for risk assets. But it’s offering us great trading opportunities, not to mention some very valuable information.
A couple of pairs that are providing both are the USD/CNH and the USD/CNY. Let’s take a look!
