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Chart Of The Day: Why Are Dollar Bears Back?

By (Pinchas Cohen/ 11, 2017 10:02AM ET
Chart Of The Day: Why Are Dollar Bears Back?
By (Pinchas Cohen/   |  Dec 11, 2017 10:02AM ET
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by Pinchas Cohen

Last week was a good week for US dollar bulls. They made money every single day, with a straight 5-day advance. In fact, it was the longest winning streak for the US currency since a reality TV star (and New York City real estate developer) became the leader of the free world and the market saw a straight 10-day advance.

The known fundamental reasons for the biggest advance for the dollar is threefold:

  1. The US Senate passed its version of tax legislation, bringing Congress a step closer to actual tax reform, once a compromise bill agreed on by both houses can be sent to President Donald Trump for his signature.
  2. The monthly nonfarm payrolls report beat expectations and showed a 0.2 percent jump in wage growth (which drives inflation) confirming that the economy is chugging along.
  3. A government shutdown was averted, even if only temporarily, leaving markets with the sense it was better to wait till December 22 for a final decision on government spending rather than today.

Why The Greenback Is About To Fall

Still, despite a higher Friday close, the dollar gave back more than it took. That happens when supply exceeds demand.

Why would bears have the last word after a fundamentally bullish trifecta of headline events?

DXY Daily Chart Since March
DXY Daily Chart Since March

The bearish Shooting Star – or when the bears pushed back – was under the long-term downtrend line since March.

In October, we reported that the Dollar Index completed an H&S bottom. The upside breakout then was also stopped dead in its tracks by the very same downtrend line.

Moreover, since the price fell from that point back below the neckline from the high of 95.15 on November 7, down 2.75 percent to the low of 92.50 on November 27, the H&S has failed. When that happens, its supply-demand dynamic reverses, transforming a reversal pattern into a continuation pattern.

DXY Daily Chart Since June
DXY Daily Chart Since June

The Shooting Star is like a finger pointing at the long-term downtrend line, as if to show the point of resistance and the reason for the likely reversal from last week’s 1.09 percent gain, as a prelude to a resumption of the prior downtrend.

At the time of writing, 5:30 EDT, the price is struggling over the 50 dma (green), currently at 93.79. A close below it would add a technical milestone for the bears, while a close above it would suggest increased volatility between the 50 dma and the downtrend line since March, at 94.10, per the current angle and dropping each day. Naturally, such fluctuation increases the chances of an upside breakout, which would increase the likelihood of a bottom reversal again.

Finally, the decline suggested by a Shooting-Star (whose force is compounded by the same downtrend line that helped form it) could be the making of a right shoulder to an H&S continuation pattern. This pattern, in mirror image of the failed H&S bottom-reversal mentioned above, reinforces the continuing nature of the failed H&S reversal.

Trading Strategies

Conservative traders would wait for a trough to be posted lower than the former, 91.01 trough, registered on September 8.

Moderate traders may wait for a downside breakout of the continuing H&S, whose neckline is currently at 92.40.

Aggressive traders may enter a short position now, relying on the long-term downtrend line, compounded by the bearish Shooting Star. A close below the 50 dma would reinforce that view.

Targets – Where Bulls Are Waiting

  1. The November-December congestion, marked by the 100 dma (blue), currently at 93.33
  2. November 27 trough, at 92.50 (bottom of the continuing H&S right shoulder)
  3. September 8 trough (head of the failed H&S bottom-reversal), at 91.35
  4. Failed H&S bottom-reversal’s target of 300 pips, below the head, at 88.35

Stop-Loss – Where Bears Are Waiting

Above 94.09, the Shooting Star’s high price.

Risk-Reward Ratio

Select a target and stop-loss combination that would provide you with a minimum 1:3 risk-reward ratio, to provide you with better statistical results on the totality of your trades.

Example 1 – Far Stop-Loss, Close Target:

  • Entry: 93.77
  • Stop-loss: 94.18 (one point higher than the November 21 high)
  • Target: 93.33

Risk-Reward Ratio: 41:44, or almost 1:1, and that’s without factoring in the cost of trading. These kinds of ratios will get your equity erased, unless of course you’re clairvoyant.

Example 2 – Far Stop-Loss, Far Target:

  • Entry: 93.77
  • Stop-loss: 94.18
  • Target: 92.50

Risk-Reward Ratio: 41:127, or 1:3

Example 3 – Close Stop-Loss, Far Target

  • Entry: 93.99
  • Stop-loss: 94.18
  • Target: 91.35

Risk-Reward Ratio: 19:264, or 1:14

Note: While the last option provides a superior risk-reward ratio, it requires more work and patience and few trading opportunities. A trader must find the trading style, as well as asset management plan, that suits his temperament and resources.

Chart Of The Day: Why Are Dollar Bears Back?
Chart Of The Day: Why Are Dollar Bears Back?

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