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CHANNEL LINES


Channeling The Dollar

05/19/05 07:37:03 AM
by David Penn

A pair of trend channels guides the greenback higher.

Security:   DX
Position:   N/A

In their earliest stages, uptrends tend to remind me of airplanes taking off. First, a high-speed race down the tarmac, then the few yards during which the nose of the plane tilts upward and the plane begins to lift slowly off the ground, the incline increasing, growing steeper and steeper until, with a shudder of landing gear retracting into the belly of the aircraft, we are up and away ...

So it has been with the dollar in 2005--and trend channels have been in place every step of the way.

Figure 1: As the trend matures and moves higher, a second trend channel can help track prices as the bull market intensifies and the slope of the advance grows steeper.
Graphic provided by: Prophet Financial, Inc.
 
The first trend channel is nearly horizontal--but it is our "cruising down the tarmac" trend channel. This channel is confirmed by touches in early February and mid-March and prices for the US dollar (here shown in Figure 1 as continuous futures on the dollar index) in mid-May are as of this writing streaking toward a test of the upper boundary once again.

There is a second trend channel, however, one that might hold more clues to the near-term direction of the greenback than the older, more established trend channel. This smaller, second channel is our "plane's nose lifting higher and its front wheels losing touch with the ground" phase of the advance and the steeper incline of the new channel relative to the old one underscores the notion of prices "taking off." This second channel has also been confirmed by two touches: one in earliest April and another in earliest May.


There have been a number of interesting instances of this kind of old-channel-leads-to-new in recent months. I wrote about one pair in the Standard & Poor's 500 ("The S&P 500's Spring Channel Surfing," Traders.com Advantage, March 11, 2005), and a similar pair on a shorter time frame was very much present during the March-April declines. Based on the experience of these channel pairs, there are some guesses as to what type of movement the greenback might make with regard to its channel pair.

Assuming the greenback continues to advance, look for it to break out above the old channel but perhaps find resistance at or near the upper boundary of the new channel. A pullback from that move should be expected to find support at the upper boundary of the old channel.

Again, those are assumptions based on the behavior of previous channel pairs. There is no guarantee that the greenback will follow the pattern. But those looking to fade the dollar's bull market may want to remain wary in the event that it does.




David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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