Today’s alert is going to be a bit shorter than usually, as the most important technical developments were seen in the USD Index and what happened, has profound implications on all currency pairs that we feature. To make a long story short, in our opinion, all speculative positions in the currency market should be closed and profits should be taken off the table and the reason is that it seems that the USD Index is about to reverse its direction (more precisely: the reversal already took place).
In other words, in our opinion the following forex trading positions are justified - summary:
What made us take secure profits at this time? Let’s take a closer look (chart courtesy of http://stockcharts.com). The following is mostly a quote from today’s Gold & Silver Trading Alert – we covered the currency market also there, because it is currently a major factor with regard to the outlook for precious metals.
In Wednesday’s alert we wrote the following:
Now, since the USD Index has already moved to the mentioned 50% retracement, is the bottom in? It could be, but it doesn’t have to be. If it had taken several days for the USD Index to reach this level (and the rising support line, at the same time), we would view the bottom as being most likely in, but given that it took just one day to decline so significantly, we think that there might be a few additional daily declines before the decline is truly over.
The sessions that we marked on the above chart (similar based on the hangman candlestick and also based on the follow-up decline) were all followed by at least a few daily declines, which suggests that there may be more to come.
Consequently, we added other relevant support levels to the above chart to estimate the size of the entire short-term move. It appears that most of the decline is already behind us, but an additional slide – to 94.50 or so is quite possible as well. The lowest of the likely target levels is created by the 61.8% Fibonacci retracement and the August low at about 94. We don’t expect the USD Index to move below this level (if it is not stopped higher – for instance at 94.50 or at the current levels – that is).
The USD Index bottomed almost exactly at 94.50 – at the intersection of 2 support lines and at the lower border of our target area. This, by itself, suggests that the bottom is in.
However, the way the USD bottomed (on an intra-day basis) yesterday, makes it even more likely that the bottom for this short-term decline is in. The USD Index formed a hammer reversal candlestick and this is what we saw in case of the final part of previous similar declines. The declines that started with the “hangman” candlestick were all followed by steep declines (with only very temporary pauses) and they ended when the USD proved that it could end one session higher and/or if the USD managed to reverse visibly before the session’s end. We saw both yesterday: the reversal and a daily move higher (only a slight one, but still).
Moreover, similar daily reversals were seen when the USD moved to the rising support line (the highest one) in the second half of August. They were followed by a sharp rally.
Finally, please note that gold didn’t move to new highs yesterday (far from it – gold actually declined) even though the USD moved to new lows – which is a clear sign of underperformance and a bearish confirmation.
All in all, yesterday’s session’s implications are bullish for the USD Index and it seems that the previous short-term downtrend is over. Therefore, we think that closing the speculative positions in currency pairs that involve the USD is justified from the risk to reward point of view.
As always, we will keep you – our subscribers – updated.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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