Analys från DailyFX
Dollar Traders, Think Inside the Box
Despite short-term volatility, the US dollar index has been in a tight range for all of 2013, and with fundamentals also supportive on the long side, a potential long-term breakout opportunity may now exist.
Investors and traders need to determine the degree of importance of the information they are basing decisions on, or more simply, decide whether they want to be an investor or trader and make decsions on the appropriate time-frame chart.
An investor would favor the monthly and weekly time frames, while a trade might favor the daily or intraday time frames. At Trading University, we believe in spending the majority of our efforts focusing on trading in the direction of the longer-term patterns. While we teach short-term daytrading tactics, we don’t always encourage their use. At times, trading requires sitting tight and just observing, and because of the decreased volume, summer is typically one of those times.
The easiest way to detemrine if a market is slowing down is by identifying the times when ranges, or boxes, form and market’s meander back and forth within tight ranges. Experienced traders also call this occurrence the “spin cycle” in reference to the cycle on a washing machine when it stops and starts repeateadly in order to wring out the water.
These formations are often seen at major inflection points when a bear market shifts to a bull market, or vice versa, and we feel we are very close to that point right now in the US dollar (USD).
As shown below, since putting in resistance last summer at approximately 84.00, the US dollar index has essentially been trading sideways this past year. The two-and-a-half-year high, which was briefly eclipsed in July of this year, and the one-year low posted in September 2012 mark out a box that contained the greenback for all of 2013.
Guest Commentary: The US Dollar “Box” Trade
We still see the underlying fundamentals as being bullish for the US relative to major trading partners, and we agree with Nomura and Deutsche Bank’s long-term bullish analysis. As we have been saying for years, the US was the first major economy to go the quantitative easing (QE) route, and therefore, it will be the first to exit that strategy, which will naturally lead to an uptick in US rates.
The trillion-dollar question, of course, is how to profit from that if we’re right?
We favor long US dollar positions and would consider dollar-cost averaging into long positions. This strategy would entail buying a fixed dollar amount of a security every two weeks or every month with the idea of accumulating it as an investment.
From a long-term perspective, we view a further drop in the dollar as a potentially historic opportunity. If we liked it at 84 for a potential breakout, we would love it near the 79 handle. If you opt in to that type of thinking, however, you need be able to make decisions on a weekly or monthly basis.
If you like to trade shorter term, then you may need to apply countertrend tactics, which we don’t generally recommend, preferring instead to wait until the shorter-term patterns align with the longer-term patterns. In this case, we consider the two-year uptrend currently in place as the longer-term trend, and we are waiting for the shorter-term pattern on the daily or four-hour chart to turn higher.
By Jay Norris, author, The Secret to Trading: Risk Tolerance Threshold Theory
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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