Primary Chart: DXY Daily Chart with Upward Trendline, Downward Trendline and Fibonacci Levels
Dollar strength starting in early 2021 lasted until the fall of 2022. It was nothing short of impressive. But DXY (the dollar measured against a basket of five other major currencies) started topping in September 2022 and then began making lower lows and lower highs, the very definition of a downtrend.
Technical evidence shows that DXY may be reversing higher. Interestingly, it is reversing higher right at key support shown by the dark purple line at 101.29. No one knows whether DXY will return to all-time highs or whether it will fail at one of the many technical obstacles presented on the Primary Chart above. But one can extrapolate from the technicals that a significant reversal has taken place in the dollar. This may lead to multi-week or multi-month strength, or it may lead to a choppy price action that retraces some portion of the downtrend since September 2022 (see Fibonacci levels above) or creates an sideways choppy range for some time.
The main technical points concerning this reversal follow:
One could make a bold prediction (bearish on risk assets) that the dollar is heading back to new all-time highs. Or one could say that risk assets will continue to rise to new all-time highs so this move in the dollar will be short-lived. These are both rooted in a biased idea of how DXY and SPX / NDX correlate and should move in the intermediate term. Rather than making bold predictions from a clear reversal in DXY, it helps to remain open to the price action and how it unfolds. We can recognize the reversal for what it is and what it implies without the need to become mired in tenuous predictions about whether DXY is returning to new all time highs. If price recovers the .618 retracement, the odds rise dramatically for new all-time highs. But until then, we can expect dollar strength based on the reversal patterns discussed. And the Fibonacci retracements are not unreasonable targets to expect in the coming weeks and months.
Lastly, consider that the dollar remains in an uptrend that has existed even longer than the one since May 2021. This is the 15-year uptrend represented in the Supplementary Charts B.1 and B.2 below. The yellow line on the Primary Chart only represents a rate of trend that has existed for a little more than 1.5 years, but this trend has occurred within an even larger degree uptrend in place since about 2008.
Supplementary Chart B.1
Supplementary Chart B.2
Thank you for reading and considering these charts!
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Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Dollar strength starting in early 2021 lasted until the fall of 2022. It was nothing short of impressive. But DXY (the dollar measured against a basket of five other major currencies) started topping in September 2022 and then began making lower lows and lower highs, the very definition of a downtrend.
Technical evidence shows that DXY may be reversing higher. Interestingly, it is reversing higher right at key support shown by the dark purple line at 101.29. No one knows whether DXY will return to all-time highs or whether it will fail at one of the many technical obstacles presented on the Primary Chart above. But one can extrapolate from the technicals that a significant reversal has taken place in the dollar. This may lead to multi-week or multi-month strength, or it may lead to a choppy price action that retraces some portion of the downtrend since September 2022 (see Fibonacci levels above) or creates an sideways choppy range for some time.
The main technical points concerning this reversal follow:
- DXY was in primary-degree uptrend since May 2021, and this ended at a high of $114.77 in September 2022. Note the yellow uptrend line that dates back to the May 2021 lows.
- After reaching its high in September 2022, DXY began forming lower highs and lower lows. This started with a trading range that lasted for some time indicated by the teal rectangle covering price action from September to November 2022. This area forms an area of major resistance that could likely be reached as part of a backtest of this range or a move to new multi-year highs.
- The 8-hour DXY chart shows the Bollinger Bands' jaws opening (2 standard deviations) indicating an expansion of volatility consistent with the start of a new trend. Price is now walking the bands, a sign of strength and momentum sufficient to continue the start of a new trend. This technical feature should soon translate to the Bollinger Bands on a daily chart, which still show compression. Price first pierced the lower Bollinger Band, which is a fakeout that is not uncommon just before a breakout after a volatility squeeze (shown by compression in the bands). See Supplementary Chart A below.
Supplementary Chart A
- The first (most conservative) target is a backtest of the yellow uptrend line from May 2021. That lies around $103.60 to $104.50 in the next few days.
- If the yellow uptrend line is reclaimed, that will be a further bullish development that will likely lead to a significant retracement of the decline from September 2022. In this case, the second conservative target is $106.15, which coincides with the 38.2% Fibonacci retracement of this multi-month decline.
- The third target is the 50% retracement at $107.80, and it is reasonable to expect if the yellow uptrend line is reclaimed.
- The final target is the 61.8% Fibonacci retracement at $109.44, and this is also valid target if the yellow uptrend line is reclaimed. This level coincides with major resistance (formerly support) at the base of the trading range that developed as DXY was topping in September - early November 2022.
One could make a bold prediction (bearish on risk assets) that the dollar is heading back to new all-time highs. Or one could say that risk assets will continue to rise to new all-time highs so this move in the dollar will be short-lived. These are both rooted in a biased idea of how DXY and SPX / NDX correlate and should move in the intermediate term. Rather than making bold predictions from a clear reversal in DXY, it helps to remain open to the price action and how it unfolds. We can recognize the reversal for what it is and what it implies without the need to become mired in tenuous predictions about whether DXY is returning to new all time highs. If price recovers the .618 retracement, the odds rise dramatically for new all-time highs. But until then, we can expect dollar strength based on the reversal patterns discussed. And the Fibonacci retracements are not unreasonable targets to expect in the coming weeks and months.
Lastly, consider that the dollar remains in an uptrend that has existed even longer than the one since May 2021. This is the 15-year uptrend represented in the Supplementary Charts B.1 and B.2 below. The yellow line on the Primary Chart only represents a rate of trend that has existed for a little more than 1.5 years, but this trend has occurred within an even larger degree uptrend in place since about 2008.
Supplementary Chart B.1
Supplementary Chart B.2
Thank you for reading and considering these charts!
________________________________________
Author's Comment: Thank you for reviewing this post and considering its charts and analysis. The author welcomes comments, discussion and debate (respectfully presented) in the comment section. Shared charts are especially helpful to support any opposing or alternative view. This article is intended to present an unbiased, technical view of the security or tradable risk asset discussed.
Please note further that this technical-analysis viewpoint is short-term in nature. This is not a trade recommendation but a technical-analysis overview and commentary with levels to watch for the near term. This technical-analysis viewpoint could change at a moment's notice should price move beyond a level of invalidation. Further, proper risk-management techniques are vital to trading success. And countertrend or mean-reversion trading, e.g., trading a rally in a bear market, is lower probability and is tricky and challenging even for the most experienced traders.
DISCLAIMER: This post contains commentary published solely for educational and informational purposes. This post's content (and any content available through links in this post) and its views do not constitute financial advice or an investment or trading recommendation, and they do not account for readers' personal financial circumstances, or their investing or trading objectives, time frame, and risk tolerance. Readers should perform their own due diligence, and consult a qualified financial adviser or other investment / financial professional before entering any trade, investment or other transaction.
Comment:
Hypothetical price path. This is one way that the thesis could play out. Even if the dollar is to retrace higher, showing strength over the coming weeks / months, no forecast could accurately capture the price path. The permutations of the various price points for each given period (even if one correctly calls the correct direction) are likely infinite especially given that each particular day has countless probabilities for where price could open / close, etc, and to create a price path, one must combine multiple days over a period of weeks to months, each with many different possible price points.
Comment:
DXY continued higher today after showing a breakout above a down TL last week. The post noted the first level of resistance as the most conservative target: "The first (most conservative) target is a backtest of the yellow uptrend line from May 2021. That lies around $103.60 to $104.50 in the next few days."
The edge of this zone was tagged today with a high of $103.76 intraday and a close of 103.62. The post didn't anticipate this level being reached in a single day, and because the line slopes upward over time, the zone was given to indicate a range depending on the day this uptrend line was reached (later in time equals higher b/c the line slopes upward).
Next we need to see what happens at this level. Will price fall a bit and consolidate or will it push straight through the line after Powell's speech? Sometimes, it would be nice if the Fed officials would just stop talking. Just release a statement instead of whipsawing the market around with ambiguous statements, corrections, subsequent statements, subsequent corrections / amplifications, etc.
The edge of this zone was tagged today with a high of $103.76 intraday and a close of 103.62. The post didn't anticipate this level being reached in a single day, and because the line slopes upward over time, the zone was given to indicate a range depending on the day this uptrend line was reached (later in time equals higher b/c the line slopes upward).
Next we need to see what happens at this level. Will price fall a bit and consolidate or will it push straight through the line after Powell's speech? Sometimes, it would be nice if the Fed officials would just stop talking. Just release a statement instead of whipsawing the market around with ambiguous statements, corrections, subsequent statements, subsequent corrections / amplifications, etc.
Comment:
Fed Funds Futures for September 2023 (and other months) has been moving higher. FF Futures imply a FF rate over 5% now in September. A few days ago, it was 4.7% - 4.8%.
Comment:
DXY still has not yet achieved a breakout above the yellow uptrend line from 2021 that had been broken to the downside in mid-January 2023.
However, DXY continues to remain supported. It's pressing up against that trendline rather than having a sudden reaction lower.
This suggests from a purely technical perspective that DXY may have improved odds of breaking through this resistance—which could imply weaker equities in general as DXY pushes higher. But when this break occurs is unclear. DXY may continue chopping for some time, or it may break soon. We'll have to wait and see.
However, DXY continues to remain supported. It's pressing up against that trendline rather than having a sudden reaction lower.
This suggests from a purely technical perspective that DXY may have improved odds of breaking through this resistance—which could imply weaker equities in general as DXY pushes higher. But when this break occurs is unclear. DXY may continue chopping for some time, or it may break soon. We'll have to wait and see.
Comment:
DXY is above that upward TL from May 2021 now. For more upside, DXY needs to close above that line today or tomorrow.
Comment:
On Feb 4, when this post was first published, DXY closed at $102.99. A few days ago, it reached the lower edge of the conservative target zone. The conservative target zone ranged from $103.60 to $104.50.
Today, it achieved a close at the upper end of the conservative target zone of $104.50.
This strong close coincides with short-term rates in Treasuries continuing to move up along with Fed Funds rate futures contracts. It appears that markets (DXY, yields, and Fed Funds rate futures) now are aligned with the Fed's hawkish messaging. The markets no longer appear to have a vastly different view than the Fed has about whether Fed Funds rates will be higher for longer and whether substantial rate cuts will occur this year.
Whether DXY runs to new highs above September 28 highs or whether the current rally is merely corrective of the recent 5-month decline remains to be seen. But dollar strength looks likely to continue give two decisive closes above the yellow up TL from May 2021. And the entire breakdown below it appears to be a failed breakdown = bullish in the near term at least.
Today, it achieved a close at the upper end of the conservative target zone of $104.50.
This strong close coincides with short-term rates in Treasuries continuing to move up along with Fed Funds rate futures contracts. It appears that markets (DXY, yields, and Fed Funds rate futures) now are aligned with the Fed's hawkish messaging. The markets no longer appear to have a vastly different view than the Fed has about whether Fed Funds rates will be higher for longer and whether substantial rate cuts will occur this year.
Whether DXY runs to new highs above September 28 highs or whether the current rally is merely corrective of the recent 5-month decline remains to be seen. But dollar strength looks likely to continue give two decisive closes above the yellow up TL from May 2021. And the entire breakdown below it appears to be a failed breakdown = bullish in the near term at least.
Trade closed: target reached
SquishTrade
