Is the U.S. dollar sailing north with the U.S. fleet? It is tempting to draw a direct correlation between the missile strike on Syria and the dispatch of the U.S. Navy strike group to waters off Korea and China. There is no doubt that these assertive actions have impacted on the US dollar.
The rally on the U.S. dollar highlights one of the conundrums with the application of technical analysis. Does the chart move the market or the market move the chart? Just two weeks ago we applied chart analysis to the U.S. dollar chart. In this analysis we identified support and rebound levels.
We noted the dominant feature on the weekly dollar index chart was the broad trading band between $0.93 and $1.005. This trading band has dominated dollar index behaviour since 2015 January. The move above $1.005 was very important because it is a breakout from this prolonged 22 month sideways trading pattern.
The failure of this support level showed short term weakness, but not trend weakness. It's the second dominant feature on the dollar index chart that explains why.
The dollar index chart has a well-established up trend line. It starts from the low near $0.92 in 2016 May. This is a well-established and tested up trend line that shows consistent bullish pressure.
The value of the trend line was near $0.99. The value of recent temporary support for the dollar index is also near $0.99. This combination of two support features suggests that the dollar index would find strong support near $0.99 and use this as a rebound rally point for a continuation of the long term uptrend.
The U.S. dollar index dipped below the $0.99 level defined by the horizontal support level and the up sloping trend line. The dip was temporary with a close above these two features. The subsequent rebound rally has been strong with a rapid move above the critical long-term resistance level near $1.005.
Traders applied the ANTSSYS trade and analysis method to identify the opportunities as the rally rebound developed from the trend line.
Here's the conundrum; What caused this rally? Was in a prescient awareness of the more aggressive approach adopted by President Trump last week? Did we know something the market did not?
The answer is that we had no inside knowledge, although at times the conclusions based ion chart analysis suggests that inside knowledge is in play. What chart analysis does understand is the relationship between repeated behaviours in the market. The up sloping trend line had acted as a strong support level in the past so there was a high probability it would do so again. The recent horizontal support level was an additional confirming feature and it crossed the trend line at essentially the same point that the dollar index would also test trend line support.
Behavioural chart analysis suggests this was a point where there was a high probability of a rebound rally. This style of analysis does not seek to identify the event that will initiate this rally but we do know that often there is an event that precipitates this rebound. Applying chart analysis tells us to be alert for the news stories and the breaking events which will provide the impetus for the rebound from the support features. That's a significant trading edge.
Of course this is a probability matrix. There was a high probability of a rally rebound from near $0.99. There was a lower probability that these support features would fail.
These same support and resistance features are used to set both short term and long term dollar index targets. The next resistance level above $1.005 is near $1.04 where the dollar index paused in the initial Trump propelled breakout. The longer term target is near $1.08 and is calculated using classic trade band analysis.
Traders prepare for a rally rebound and uptrend continuation. We use the ANTSSYS trade and analysis method to identify the opportunities as the rally rebound develops from the trend line.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.
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