Don't Deny the Dollar

Hi everyone,

I hope you’ve had a good week!

In the last couple of posts I’ve focused on the loss of momentum in US equities which our Checklist Report helped us to identify and trade in real time. With the range trade having played out just as we expected this month, I thought I would focus today’s blog on some of the other ideas that we have shared with Trading Club members in our latest weekly video analysis.

Whilst much of the attention has been on stocks, there has been a lot taking place in currencies. The US dollar is arguably the single most important market to watch in global macro, and it has been trending lower since June. The knock-on effect of this helped to propel gold and US equities to record highs in August. Indeed, our Checklist process was for the most part aligned with the move… until now!

As you can see below, our US dollar Checklist presented a score of -1 as we began the month. At the time the dollar index (DXY) was trading between 92 – 93, save for an intraday head fake below 92 which registered as the lowest level since May 2018. With a score of -1, we expected the greenback to remain under pressure, despite the growing chorus from contrarians.

Ultimately, the contrarians managed to take control over the shorts and were helped by the technical extreme following several weeks of negative momentum. Technicians amongst you may note the bullish RSI divergence on the daily chart, which saw the market break above 94 and caught our Checklist offside.

It’s always easier to talk about your winning trades than when things haven’t worked out. But the reality of trading is that it is at times unpredictable, and often very hard, particularly when the market has already moved very far in one direction. Whilst we accepted that this trade was one to move on from, it will be interesting to see whether we get a reaction around the 38.2% Fibonacci retracement level around 96 (especially if the RSI is simultaneously overbought).

Nonetheless, we have managed to identify a number of winning trades in other currencies over the same period, which more than make up for the losses in the US dollar. Firstly, here’s our score for the Euro which suggested that we should look to sell short ‘overbought’ signals towards the top of the range.

There are three (nearly four!) short setups highlighted on the chart below. The first provided an opportunity to sell 1.20 and cover towards 1.18 – a great trade over just a couple of days. The next setup came on the 10th around 1.19, with a further opportunity at the same level on the 15th. By the 17th, the euro had traded as low as 1.1750 for another profitable trade. Unfortunately the hourly RSI didn’t quite breach the 70 threshold on the 17th, otherwise that would have created a fourth opportunity to go short – this time at 1.1850 – before a breakdown to new lows.

The Japanese yen has been another area of interest, following what seemed like months of doing very little (with successive ‘0’ scores on our Checklist). This month saw a score of +1, which contrasted the -1 seen in the US dollar nicely for a potential short USD/JPY setup.

Having updated the Checklists just before the turn of the month (the 26th from memory) we managed to capture the spike higher to 107. When there is an opposing extreme in price, it is often a great setup when following the Checklist score. Even if you didn’t catch the first opportunity, there was another overbought signal on the 3rd around 106.50, which coincidentally was the opening price when we updated the Checklists before that first move higher. From there, one could have held their short position whilst the market sold off to a new 52-week low at 104.

With September coming to an end, we will be updating each of our Checklists next week as we look ahead to the new month of October. With the action beginning to pick up in markets, and the US dollar potentially changing course (a new uptrend, or just a correction?) I am certainly looking forward to it with great anticipation…

If you would like to join us for our full analysis including new insights each week, or learn from the ground up with online tuition from Lex in our MDT online course, then head to milliondollartraders.com and take your financial knowledge to the next level right away!

Have a great weekend,

James

Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information. For more information go to www.milliondollartraders.com

© Copyright 2020 Lex van Dam Financial Education. Further distribution prohibited.