Market forecasting, especially when looking at short-term moves, is as much an art as it is a science.
If there was a single proven method that could predict every little squiggle on a chart, there would be many more successful traders.
That’s why it’s so important to have a framework or a system that allows you to adapt to the market when conditions change.
A perfect example of this concept can be found in the price chart of the U.S. dollar index (DXY).
On June 5, I wrote about how the dollar was at a crossroads. DXY enjoyed a nice rally from April 13 to May 31, going from 100.78 to 104.69.
But for the rally to really pick up steam, the market would have to break through an important overhead resistance zone. That zone spanned from about 105.20 to 105.65.
If DXY can’t break through the zone, then it likely means we will see a period of dollar weakness. At the time, I wrote that the odds of DXY breaking one way or the other were about as reliable as a coin flip.
Now, however, the picture has changed, and the odds have shifted significantly. Instead of seriously testing the resistance zone, DXY instead broke sharply lower.
Let me walk you through an updated price chart of DXY below so I can show you what I mean.
Around June 7, DXY looked as though it would find support on the 20-MA. Breaking below this technical indicator was an initial warning sign that the dollar’s recent uptrend was now in jeopardy.
The next line of defense for the dollar was the 50-MA. You can see how the market has now broken below the 50-MA as well. This is a bearish signal that doesn’t bode well for the buck.
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This technical weakness in DXY suggests we should be on the lookout for opportunities to be short the dollar instead of being long.
This means the best trade setups will be to wait for bounces as potential reasons to sell the dollar against its peers.
The key to this bearish scenario in the dollar is the 104.70 price level in DXY. So long as the dollar index remains below 104.70, which coincides with the monthly high from May, it makes sense to look for those shorting opportunities.
As the price action in the dollar continues to develop, I’ll be sure to update you right here.
Happy trading,
Imre Gams
READER MAILBAG
Have you traded the dollar before?
Let us know your thoughts – and any questions you have – at [email protected].