Confluence Of Signals Hitting The U.S. Dollar

Posted by barkand on July 11, 2011 under Classic chart patterns, Currencies, Point and figure charts | Be the First to Comment

For several years now, the only times that the market has shown any interest in the U.S. dollar ($USD) is when the dollar appears to be less ugly than the alternatives. Based on how the charts have developed, we feel that the dollar has now reached a critical point. Will the downtrend continue? Or can the dollar actually have something resembling a rally? It is perhaps a bit early to become aggressively bullish, but we are on the lookout for some positive movement in the dollar.

First up is a weekly candlestick chart going back two years. There are many different things converging here.

• The dollar is now hitting the long-term trendline (the dashed red line) from the 2010 highs. Can the dollar break through it or will the resistance be too strong?
• There is also a short-term symmetrical triangle (the solid green lines) forming from the last two months of movements. This is usually a continuation signal, which is to say the dollar should continue getting weaker.
• On the other hand, the dollar recently managed to make a bottom without tagging the lower Bollinger band. We interpret this as meaning that the market is shifting to a more bullish position.
•  And then there is the width of the Bollinger bands themselves, plotted below the main chart. The distance between the bands has reached its most narrow point since early 2010. We should now be on the lookout for a significant move – either up or down.

If (and it is really only “if”) the dollar could get stronger from here, we can see it going to the high-78 area based on the size of the triangle.

 

To help us make up our mind, let’s consult a point-and-figure chart of $USD. We use the daily high-low method as the currency markets do not “close” the same way as other markets. Here, we are using a quarter-point box with a 3-box reversal. On this point-and-figure chart we can see the same symmetrical triangle from the candlestick chart above. However, interpreting a symmetrical triangle on a 3-box reversal chart is not so clear. If the pattern is “big enough” it can be a reversal rather than a continuation. Is this one big enough?

Also notable on this chart is that a high above 75.25 — which may happen today — would generate a new column of Xs. The chart would recognise that the short-term trend is up. But even if it did happen, the market could then quickly reverse into a new column of Os and we could still consider ourselves to be inside the triangle.

If we do go out of the triangle in an upward direction, the chart has previously provided a price target of 82 based on the reversal from the April low. That could be revised according to the amount of energy behind whatever breakout does occur. 

So far we have identified a target of maybe possibly 79 and another at 82. Let’s go back to the candlestick chart, this time with Fibonacci retracement values superimposed. Guess what? There is one resistance level in the high 78 area and another just above 82.

 

What does it all mean? We believe a big move in the U.S. dollar is coming, and soon. Our guess is the big move will be in an upward direction. However, we are not selling body parts for dollars at this time. We are more comfortable with waiting and watching intently for the next week or two while the market decides what it wants to do.