Guest Commentary: Dollar Index On the Technical Cusp
Yesterday the dollar index was pushing at it's downtrend resistance level; it has pulled back today in early trading. The trendline currently crosses at very close to 77, the index currently trades at 75.73, down from 76.01 close yesterday. I love short-term trading, but the more popular question seems to be is this Dollar Index (DX) going to turn around? Through May we have seen our biggest rally of the year, after a storm of selling so far in 2011, and it does warrant attention.
Figure 1. Dollar Index - Daily
The trend does remain down with the primary trendline crossing at 77. A rise above 77 would indicate the downtrend has weakened and a potential trend reversal is in play. As mentioned we have pulled back from this level at the moment. Near-term support is at 75 and extends down to 74.50 - 50% retracement level of the current rally is just above this at 74.70. Primary support is at 73-72.90.
Let's talk scenarios for a second:
-IF this is a first wave higher in a new uptrend, support should enter the market by 74.25 or 73.45 at the latest (further Fib retracement levels adjusted slightly to factor other measurements). Failure to support there gives early indication we may see another low.
-The scenario above tells a bit about what to look for IF this rally was just a correction and the downtrend is likely to continue. We are very near an inflection point (or the "technical cusp") so a little patience will be rewarded here. We are near the primary downward trendline so a short trade could be taken with little risk, but currently we have not seen short-term price action that would indicate we are about to enter a sell-off (check multiple time frames!). That said, the longer-term trend is down...so let's talk about how strong that trend looks.
There are a couple interesting things involving volume and open interest.
You will see I have flagged two areas on the chart with horizontal lines. Between those lines you may see many things, but the two things that caught my eye: 1. the price reversal. 2. Volume reversal PRECEEDING the price reversal. We are comparing a top to a potential bottom here, but that should not really be of concern in this market in this particular market.
Therefore, volume seems to have peaked in early may, and if our last climax in volume tells us anything, normally a reversal is not too far off. Close analysis of the last volume spike reveals we did see a higher price high after volume eclipsed. Therefore, this is not an imminent sign of a reversal, we could still see another low, but with things as they are now, the volume scenario does indicate a reversal is close. We have the other elements of the analysis to help us determine this as the rate progresses.
Next interesting thing is open interest. If we look at prior trends we see that open interest generally continues to carry it's dominant trend after price has already reversed. The open interest trend usually lasts till after the the first wave of a new price trend (sometimes even longer). Then as price continues on its new course after wave one, open interest will begin to trend the opposite direction it was prior. So something here is suspect to me.
We have seen the largest rally of the year and given the former statements, open interest continues to rise and it may continue to rise for a bit. If price can hold, I believe that means a world of hurt for the short positions as they are forced to unwind...which ultimately results in the reversal of the open interest trend which follows price reversals. But there remains a timing issue with this indicator (as with the volume)...which brings us back to short-term resistance and support levels for entries/stops.
There is a bit to digest. So in summary here is my take:
There are a couple things which make me skeptical this downtrend can last much longer. That said, don't jump the gun as the dominant price trend remains down. Watch the 77 and 74.50 levels. These give us indications into what is likely for the future in the context of prior comments.
To profitable endevours.
Cory Mitchell, CMT
Chief Technical Analyst
Cory Mitchell is an independent trader specializing in short- to medium-term technical strategies. He is the founder of http://vantagepointtrading.com/, a website dedicated to free trader education and discussion. After graduating with a business degree, Mitchell has spent the last six years trading multiple markets and educating traders. He has been widely published and is a member of the Canadian Society of Technical Analysts and the Market Technicians Association.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.