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US Dollar Reversal At Hand

11/16/10 07:37:21 AM
by Donald W. Pendergast, Jr.

Trends don't usually turn on a dime, and the US Dollar Index has also been taking its time in preparation for what looks to be a significant trend reversal -- toward higher ground.

Security:   DX, UUP
Position:   Buy

The US Dollar Index (DX) has covered a lot of ground during its slow, yet steady decline, one that kicked off on June 8, 2010. The index (you can trade it as a DXZ10 futures contract for the December 2010 contract) was at 89.165 then before slipping all way down to 75.235 on November 3, 2010 -- a 15.62% decline in less than five months. The index was in process of hammering out an interim low when that recent bottom was made, however, and now appears to be on the verge of a full-scale trend reversal move, one with initial targets in the low $80 range. Figure 1 is a closer look.

FIGURE 1: DX, DAILY. Despite tons of negative sentiment toward the US dollar, this chart makes a powerful case for a bullish trend reversal for the US Dollar Index futures contract (DXZ10). The first price target is near 80.00, with the second one near 81.60.
Graphic provided by: TradeStation.
Graphic provided by: Roy Kelly TrendPro indicators.
One of the beautiful things about trading the US Dollar Index futures (DXZ10) is that it can not only be used to help time trades in this key currency benchmark, but it can also be used to assist in the timing of precious metals futures contracts, especially silver and gold. I'd previously written here at Advantage about the 76.00 area being a possible support/reversal point for the DX; the index finally made an interim low at 75.235, not even touching the extreme lower Keltner band before beginning a period of sideways movement.

During the consolidation (pink shaded box), the DX featured a couple of bear trap reversal bars (blue ovals); these are typical at major tops and bottoms and lure overconfident bears (bulls) into believing that the existing trend is ready to continue in the same direction.

Then the prices abruptly reverse, catching the bears (bulls) off guard; they then need to quickly reverse their positions or go flat. Two of these wide-range reversal bars occurring within eight trading days of each other is certainly worthy of attention, and now that the DX has issued a new buy signal (red oval), it appears that the index will have little problem reaching the first price target level of 80.17, which is a Fibonacci 62% resistance area (green shaded line). Should the move gather strength quickly, there's even a chance it could make it as far as the Fibonacci 79%/Keltner band confluence area between 81.60 and 82.00 (blue shaded line).

Finally, at the lower section of this daily chart, take a look at the current COT net positions in the US Dollar Index futures -- the blue line shows the net positions for the large speculator/hedge fund group of traders and the green line displays the net positions for the commercial interests in this index. Currently, the trend-following hedge funds are continually adding to their long positions as a variety of systems give buy signals, and hence the steadily rising blue line. Meanwhile, the commercial interests appear to have already done the bulk of their buying during the recent swoon (as is typical of their behavior in a variety of commodity markets) and will likely now be selling into strength -- to the hedge funds!

Those traders who are still long significant numbers of silver and gold futures should already be preparing to exit those positions and/or to run much closer stops on positions initiated since the major July/August 2010 low in both of these markets. There is so much negative sentiment toward the US dollar in the currency markets (a near-record low numbers of bulls in sentiment surveys) these days that even a minor move higher could cause significant capitulation and a sharp rally in the DX -- with predictably ominous implications for the silver and gold markets.

The US dollar has a lot of work to do if it's ever going to make it back to 122.00 -- the last major high -- one made nearly nine years ago. This may be the first step of a very long and arduous journey for the index, but only time will tell. Watch for the price action near 80.00 and then 82.00, should this reversal carry that high on this new swing; there could be some great short-term intraday short setups in the DX in those areas. This should be a fascinating market to watch (and trade) for the next few weeks, so keep on reviewing your charts for the most probable setups.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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