Where's the USD Heading? FXCM USDollar Index Analysis

The FXCM USDollar index is a great tool for traders to use to help time entries/exits on USD based pairs, and also gain broader sentiment on how the greenback is performing against the other majors. The index (Symbol: USDollar) is a represenation of USD strength against an equally weighted basket consisting of the Eurozone EUR, British GBP, Australian AUD, and Japanese JPY (in other words, each major is weighted @ 25% against the USD).

Personally, I like to use this index to track potential reversal zones or shifts in major underlying sentiment on the safe haven currency of the world. You need to aire on the side of caution though, as the relationship to other majors isn’t as simple as shorting EUR, GBP, AUD, JPY if the index is gaining in strength (and vice versa if the USDollar is weak).

I wanted to share one of my intraday charts (H4 provided below), in hopes that others may find it useful or want to comment on how they have themselves presently positioned. Personally, I’m quite exposed on the USD right now to the downside, but for a good reason I feel.


HD Link to image.
I like to take a “top down approach” when analyzing a chart. Typically, we’d want to start on a higher time-frame, and use multiples (W1, D1, H4, H1) to break down sentiment. However, given the recent price action via the H4 (my personal favorite representation of price), one chart right now is sufficient. As for the top down approach:

For starters, I’m purely a technical trader and rarely focus on fundamentals. That being said, typically whenever analyzing a price chart I like to work from a broad viewpoint, into a more detailed understanding. What does that equate to? First, before I make a single mark on my chart (markings are nothing but tools to help externalize internal analysis and store/export that data). I center myself through meditation and ensure that my mindset is neutral before even opening up my software.

Once my emotions are balanced, and I’ve run through my trading plan for the day, I simply stare @ the chart for about 3-5 seconds without thinking anything. Most of the time, within those first 3 seconds, I can already “see” the markings I need to make and can decide whether or not my bias is short, neutral, or long- this comes with time. From there, I always recommend (as stated already) starting “big picture” and working your way down.

Here’s how to break it down:
-Technical levels: The most important aspect of my strategy. I trade off levels / certain prices- not candlestick signals and an “x pip break” or “x % retracement” of them. You need to understand where price is trading, in the greater context of the most relevant swing points and majorly obvious levels. If these levels coincide with (.00, .25, .50, .75)- even better. The first marking made was the horizontal line @ the 10500 level. Using pure price action, we’ve seen this zone act as prior support, which now is turned into current resistance. This is your “Swap” or “Flip” zone. Basic price action analysis here. What further confirms this level, and makes it even more significant to me, is the fact that from the most recent high to 10500 is about 105 pts; from the most recent low, about 115 points. What does that equate to? The zone is just about splitting price action in half @ the mean. Seeing we’re trading beneath that mean level, we then went ahead and designated the mid-point between the mean (@ 10500) and the swing low (@ 10400), and dropped a line @ 10450- which corresponds with price action. This is minor support/resistance- also known by me as a sticky point.

-Market structure: To aide in identifying structure, I employ the use of trendlines and recognizable patterns- primarily wedges, breakout structures, channels, and sometimes harmonics. As for current structure, there are two clearly obvious components of the chart to be aware of. A descending trendline has been carved out, and now extends into our swap level @ 10500. Trendlines should be drawn with a minimum of 3 points of contact- anyone can draw a line between any two points on a chart. What does the trendline signify? We’re seeing lower highs- which is indicative of downward pressure. The next structure which stands out is the ascending channel off the 10400 support level. Channels can be carved out with 2 touches on each side- high probability trades exist taking the 1-2-3 pattern, where you trade from point 3 - 4 in the channel (not employed here). Ascending channels typically break down, descending channels typically break up.

-Supply & Demand: I like to use the implications of supply and demand theory to aid with understanding “who is in control”. This channel is indicative of upward momentum, which equates to demand overcoming supply- no arguing that. But, where was the “true” demand? Take a look @ what happened when price first got down into that 10400 level. There was a strong sell-off into it, a bit of sideways activity, then buyers were in control for 8 straight H4 candles before the bears could print 1 measly counter-bullish move. As price continued to become more expensive, the presence of sellers started to increase (volatility). How do we know this? Look @ the candles- there are mixings of red / blue, long wicks, sideways behavior- all indicative of a struggle b/w bears/bulls. Volatility increasing near key levels (our 10500 zone) could lead to a potential near term correction or full blown reversal and reversion to the origin point (10400)- also known as a 100% retracement. Clearly, there rests supply (those willing to sell) @ 10500. The last time price touched this level, the index sold-off 100 points hard (5/2 - 5/5).

-Price action: Now, we’re starting to get a bit more detailed in our analysis. The index rallied strong today into 10500. If we’re going to classify this swap level as our supply zone (one does exist on the H1), then we can say that the strong rally may be exhaustive in nature (a final push by buyers in an attempt to clear 10500). When you see a strong rally, under a key level, where volatility is increasing, the probability for a reversal of current momentum increases. The 1:00 PM EST H4 candle print was a nice doji-like rejection off 10500. This is representative of hesitation, coupled with some potential profit booking ahead of the week-end and under the zone where sellers may be parked. Notice how the distance between the recent highs printed by buyers is diminishing on each wave as the index begins to trade near 10500. This equates to potential hesitation from the buy side. The only way price moves on a chart is when there is a delta between supply and demand- always remember that.

-Indicators: The 14,3,3 Stoch is sitting just under the overbought extreme level. A few things before we continue: 1) You can not, I repeat, can not simply buy in oversold environments and sell in overbought environments. You will blow your account faster than you can imagine. That is not how this indicator works. 2) Use the indicator to identify momentum (leading in nature). It’s great at spotting reversal points via divergence (price action doing one thing, the indicator doing the opposite). My favorite use of the STOCH is for divergence and coils (not going to get into coil here, but, think of it as momentum winding/rotating back and forth in an ascending or descending wedge pattern.) But, we can still use the indicator here to potentially identify an overbought environment (mathematically that is). Ideally, I’d like to see price continue to maker higher lows and higher highs whilst the indicator prints lower highs and lower lows (Divergence).

Recap
Markings simply aid in enhancing your bias- is your analysis leading to a strong bearish signal, a weak bullish signal, etc? If buyers are looking to continue to bring prices higher, they’ll need to commit to this trend line break, get up above 10500, retest it to cement it in, and be off to 10550. Personally, I’m moderately bearish on the index presently, so I’m looking for price to get back under the falling trendline, test that confluence point between our ascending channel floor @ 10450, and break for another retest of 10400. Can we place 100% faith in any of this happening- NO! The index could trade sideways between 10500 and 10450 for the next 4 months. Does that mean that my bearish sentiment is something we can all take to the bank? Hell no. Please don’t. We can’t be “right” 100% of the time, and as a trader that is one of the hardest things to deal with. You may say you’re cool with it, but are you really @ the end of the day after a few losses?

Bottom line- anything in trading is possible; AN-Y-THING. It’s probability that we’re concerned with most. Analyze the charts like this, and I can guarantee the probabilities will starting stacking in your favor.

Jake

Hey traders,

I wanted to share these daily chart snapshots for the major USD-based pairs as of 1:50 PM EST. It dovetails my last report, and illustrates how most instruments are trading on the cusp of major technical levels. With NY session close quickly approaching, it is incredibly doubtful any meaningful moves will be put on heading into the weekend.

COT report comes out in about an hour as well. Will be interesting to see how institutions may be positioning themselves heading into June. Obviously, the data is 3 days old, but, sometimes it can be helpful in confirming/validating sentiment and commitment. At time of writing, the USDollar Index is trading @ 10502, and has been hovering around that level pretty much all of today.

EURUSD DAILY CHART:

GBPUSD DAILY CHART:



AUDUSD DAILY CHART:


NZDUSD DAILY CHART:

USDJPY DAILY CHART:

Right along with your “most instruments are trading on the cusp of major technical levels” comment, I noticed the CBOE Volatility Index (VIX) seems to have printed a 12-month low in the 11.5 range.

Next few weeks might be exciting!!!


Indicative of dangerous complacency in my estimation.
SPX just printed above 1900 on the heels of very low volume.
5/20 COT Report: -45K less long, +52K more short from 5/13. Open int: 11K.

The inverse VIX/Risk relationship is playing out just fine- I’m cool with that.
What jams my radar is how low yields have fallen in the US (And continue to fall).
Aggregate commodity prices are just off yearly highs (I use the R/J CRB Index).
The USD is not very strong right now.

It’s tough to get a gauge on where we stand in the risk spectrum.
Investors are gobbling up bonds, the SP500 is printing all time highs on extremely low volume, the USD is weak, risk appears to be appetizing, yet at the same time not…yikes!

USDOLLAR CLOSED @ 10498- Buyers couldn’t breach that key price point.
Have a great holiday weekend (American folks).