A bleak outlook for the U.S. economy combined with downgrades in European debt markets caused a strange upward tick in value for the dollar as foreign investors buy into dollar-backed U.S. Treasury bonds to avoid bigger equity indices risk. Analysts are projecting volatility in the U.S. dollar index and recommend watching buying activity at 74.0, and recommending trade signals based on an expectation for a higher break if the S&P stock trade is held below 1275, and/or futures trade below 1280. For more on this continue reading the following article from The Street.
As highlighted in Monday and Tuesday’s daily client notes and articles posted to TheStreet, the economic calendar from the U.S. dominated proceedings with further reactions to headlines this week likely to push the currency markets around.
Very weak data from the U.S., coupled with chaotic scenes and downgrades from European sovereign debt markets, aligned to generate the third-largest volume level to hit Wall Street since the May 2010 flash crash.
Negative U.S. business outlook perversely sent the U.S. dollar higher, as the greenback was bought in strong but volatile fashion as a global shift out of equity risk forced a move to bonds and USD-denominated Treasuries. The violent price action was in response to previously manipulated low-volume ramps higher in equity indices valuations that are being hammered lower when selling algorithms kick in.
The dollar index (76.00) is overbought in the near-term, after two one-hour periods of trade sent major currencies lower. The four-hour trends are flattening out, which sets up a buy-the-test-of-support play from the next downside move toward 75.50. It would not be wise to buy the dollar index at these levels, patience is required to wait for a test of support, and to buy from there.
Dollar Index 4-Hour Chart: Trading at the May 13, 2011 swing point high. Swing point high of Apr il18, 2011. 100-day SMA at 76.00 support. Trend-line resistance at 76.50. No long trade until a weekly chart can close above 76.80.
ABC down potential: A leg lower from 81.60 to 72.80. B leg higher to test 76.60. C leg has potential 72.50 target.
Still oversold: Look to sell the upside tests of resistance between 77.50 and 77.10.
The potential for new trade signals to form on the USD is strong, as a technical overbought reversal which gives back some of the recent USD gains may follow through after a period of volatile USD appreciation. Any open long-USD positions should be banked. The next leg of dollar buying at 75.50 support will easily be able to break higher and hold if Wall Street continues to hold S&P 500 trade below 1275.
Global traded markets have recently sold equity indices, which as a consequence of the inverse historical relationship, has generated USD buying. Usd trade is currently rebuilding the alignment to S&P 50o’s 36-month 75% correlated read.
The exchange-traded funds (ETFs) that track dollar index momentum, UUP(UUP) (dollar bullish fund) and UDN(UDN) (dollar bearish fund), are starting to make their moves, after a long period of consolidation.
The real challenge for ETF traders is that the dollar index runs 24 hours a day, and by the time Wall Street opens a lot of momentum and energy has already been put in place ahead of the ETF then being able to move. UUP and UDN are not picking up the Asian and European dollar-based moves, and at this time offer a weak reflection of near-term USD movement.
Strong buying activity was seen at 74.00 on DXY trade in April and May. This potential swing point will be closely monitored now that it has been broken as resistance.. Market alerts will be sent to subscribers if there is a sustainable bounce off 74.50 support on Monday that highlights a USD buying opportunity. Previous price action at these dollar index levels have been choppy, overlapping, and very volatile, but have resulted in USD buying.
Main DXY support: 72.50 and 74.00. Main DXY resistance: 76.50 and 78.00. The daily trading range on DXY is 40 ticks, which is below the near-term reads and indicates low speculative interest. 50-day Simple Moving Average (SMA) on DXY is @ 75.10. DXY price action has a 36-month 75% correlation to crude oil and SPY moves, and an 80% correlation to euro (Eur/Usd) currency moves.
TheLFB trade desk has been calling for the building of long-dollar positions to start, and at this stage it would seem that dollar values hinge on where S&P 500 trade decides to go. There are mid-term trade signals forming after the recent burst of USD energy allowed the dollar index to hold support at 74.50. Clients will be notified via trade signals and market alerts when price action breaks and holds, and sets up mid-term long-dollar signals. Right now, the call is for a quick reversal of USD buying, find support, and then break higher if equity indices sell S&P 500 futures trade below 1280.
It needs to be accepted that forex trade will follow, not lead, global market momentum. Price action in global trade at this point in time is very mixed, but favoring short-equity moves, consolidation and potential weakness in commodity trade, and potential buying of the dollar.
The Bank for International Settlement data below reveals that the forex market will remain contained in tight ranges from 10:00 ET until at least 20:00 ET most days, because of the weak order flows going through the US session. It also reveals why the European futures market open, from around 02:00 ET through until the Chicago reversal at 07:00 ET are the main times to expect sustainable moves. Europe dominates forex flows in the same way that the US dominates bond and equity flows.
U.K. and Euro-zone 53% (01:00 ET-11:00ET). Asia 21%. (18:00 ET-03:00 ET). U.S. 16% (07:00 ET-16:00ET). Other 10%.
TheLFB trade desk generates trade signals that highlight specific price points to trade from, and market alerts that highlight sentiment changes in global markets. TheLFB provides 24 hour market support for traders, investors, and institutions. Service offerings include analysis of three asset class areas:
- Foreign Exchange (Dollar Index, EUR, GBP, AUD, CHF, CAD, JPY)
- Equity indices and ETFs (SPY, DIA, GLD, SLV, USO)
- Commodities (Gold, Oil, and Silver)
This article was republished with permission from The Street.