When I was analyzing the monthly chart earlier this month, I stated, "Until the index drops below 75.62, "the dollar is in a position to rise. It has not dropped below that price. This is despite the overwhelming sentiment against the dollar. For example, if you look at the Commitment of Traders (COT) report, you can see the extreme short position in the dollar. Yet the dollar is holding its uptrend line on the charts, drawn from the 2008 low. That line has had two touches prior to last week's third touch, so it is a valid trend line. Interestingly, the last two lows (74.16 in Nov. '09 and 77.42 in Nov. '10) didn't make it down to the line.
This isn't to say the buck won't penetrate and close below that line. Last week, the low of 76.11 was perilously close. However, extreme sentiment against an asset class when that asset is at support lows is often the formula for a rise. The point here is that the trader must be careful. If she or he holds the opinion that the dollar is going down, this isn't exactly the place to jump in since it's holding support. That trader should already be short with profits locked in place. Going short now requires a close below the trend line and even then, one would want a tight stop. The profit potential is limited since the 75.62 prior swing low is just below. Why would anyone even be considering going short now? Talk about being late to the party. If everyone is already short (as the COT report shows), then who is left to sell? If you want to go short, read my blog on March 2 when I discussed the monthly chart and wait for a rally.
The trader who wants to go long is in a stronger position since the index is at support. However, the trader must actively manage the trade. Nonetheless, my bias is long at this point because the chart supports that position technically. If one went long and the pair closes beneath the trend line, it would be a warning. If price moves below 74.16 that would be the confirmation point for a double top and the hint for new, heart stopping lows.
Here's the weekly chart. It looks as though there was a data error for this week with the spike up so ignore the long upper shadow.
© Dianne Fecteau, 2011. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.