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The many twists and turns (waves and zigzags) of DXY

This post looks at DXY analysis from a bullish and bearish angle. It might be confusing but I am merely point out how Dollar bulls and bears could justify their point of view. My unqualified observation: DXY could potentially go much higher. Maybe crazy enough to go back to 100 by end of this year.

Twist #1 – End of retracement, back to DXY bears for now?

My favourite long term trend indicator/roadmap on the weekly time frame is signalling that the DXY’s retracement leg may be over so its back to Dollar weakening soon.

Dollar Index weekly chart

Dollar Index weekly chart; DXY now on retracement mode but resisted by 104-week ema | Source: Tradingview.com

 

Downtrend

My long term trend indicator setup combines 4 exponential moving average settings:

  • 13-week ema (quarterly trend; red)
  • 26-week ema (half-year trend; blue)
  • 52-week ema (yearly trend; green)
  • 104-week ema (2-year trend; black)

All the rules of using moving averages apply. This 4-moving average setup is one roadmap to use but it is not the only one which I will illustrate later.

What I do like about this roadmap is the way it provides visual cues. Based on this roadmap, DXY entered bear trend in Q2 last year. Q3 provided confirmation in the form of a new 52-week low and this was affirmed with another new 52-week low in Q1 this year.

 

Retracement-consolidation

Dollar Index DXY is currently in retracement mode but resisted by 104-week ema. This chart below illustrates what a downtrend pattern of new lows followed by retracement-consolidations looks like.

DXY weekly line chart from year 2000 to late-2005

DXY weekly line chart from year 2000 to late-2005

If DXY is indeed following a downtrending roadmap with a series of new-lows and retracement-consolidations in between, then this should be confirmed by a top in the current retracement and then verified with another new low.

What if the 4-moving average roadmap is wrong?

 

Twist #2 – Use a different overlay so we should be bullish?

If I remove the 52-week and 104-week ema, the technical picture takes on a different direction. If there was a bear trend signal in Q2 last year because of a dead cross in the shorter averages, then these same averages tell us that DXY is in a bull trend right now because of a newly printed golden cross.

Dollar Index weekly chart with 2-moving averages roadmap

Dollar Index weekly chart with 2-moving averages roadmap

 

How to reconcile the two?

Dollar bears expect the current up/retracement leg to end so that DXY can resume it’s big drop that started in 2017 but Dollar bulls expect DXY to correct somewhat but should continue higher for rest of 2018. How do we reconcile the two?

The current price action and all the expectations that come with them may be confusing but they are not exclusive. Whether we be bull or bear, traders agree that:

  1. Price travels in zigzag.
  2. Bulls and bears will contest critical levels.
  3. DXY set a new low early this year but could not move lower so here it is right now.
  4. Whether we call it a retracement leg the way bears see it or we call it the new uptrend, this current leg will also have a correction (down).
  5. Since bears expect a new 52-week low while bulls expect a short correction followed by a new high for 2018, which camp is correct will be answered by how low the next move will be.

 

These levels and many potential others will become highly contested

Dollar bears and the big down trend they expect can only be satisfied by a new 52-week low. Any bounce between here and the current YTD low could lead to a new high.

I think that 3 levels shown in the next chart could become highly contested. There are:

  1. Critical support for the 2015- 2017 period between 92 – 93.
  2. Former 52-week low around 91 printed in 2017.
  3. At the 90 -90.5 region, a level that capped price action for 14 weeks early this year.

Each of these has good reason to become strong support so I think that it is more likely for DXY to move higher than lower. In addition, that 14 week base early this year at the 88 region (has a story of its own) is a very long period of change of hands from bears to bulls which will only be satisfied by much higher move.

DXY weekly chart and 3 major levels

DXY weekly chart and 3 major levels

I would not be surprised if DXY goes back to 100 before end of the year.

Note: Sometimes we need to put on different hats. Even if we have strong beliefs, its good to take off one hat and put on another way just to see things from a different angle. Different roadmaps that point to DXY bullish and DXY bearish are not necessarily wrong. They are based on the setups they employ and sometimes they are driven by expectations. They are not exclusive. Price can be bullish first then bearish – just a matter of time. For traders, mind the big levels but follow the short term momentum. Move with the flow, keep our psychology balanced and healthy, keep it simple. Read, be informed but don’t make it over complicated.

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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