Bear Flag Breakdown for US Dollar Index?

Apr 24, 2009: 8:15 PM CST

It appears that the US Dollar Index broke to the downside out of a Bear Flag formation, hinting that lower prices are yet to come (and perhaps higher prices for certain commodities).  Let’s take a look at the Daily Dollar Index.

The whole Dollar price structure appears to be forming a larger bearish pattern, with the initial down-thrust to the December lows being the start of a move that was interrupted by a “Dead Cat Bounce” sort of awkward movement up to new highs on a clear negative momentum divergence.

Price now could be breaking downwards out of a Bear Flag that began with the highs above the $89 level.  A price projection (measured move) using the conservative upper trendline at $87 would project price to test the $81 level below (the “pole” measured roughly $6).

Ironically, the rising 200 day SMA is at the $82 level which gives a “Magnet Trade” or open air target down to that confluence support level.

If we do get this push down to $82 or less in the Dollar Index, we would expect to see the upward move in Crude Oil continue and might expect a push up in Silver and Gold and some other commodities.

Let’s keep watching this move, and if you so feel inclined to trade it, one way to do so might be shorting UUP which is the PowerShares Bullish Dollar fund, or buying UDN, which is the Dollar Bearish PowerShares fund – though do your research before trading either of these.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Travel to the LA Trader’s Expo in June to hear Corey speak on “Idealized Trades for Intraday Traders”

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23 Comments

23 Responses to “Bear Flag Breakdown for US Dollar Index?”

  1. Tom B Says:

    Corey,

    Over the last decade, the US equity markets have run opposite the dollar, correct? So, won’t a weakening dollar simply continue to fuel this multi-week rally?

  2. Corey Rosenbloom Says:

    That’s the hidden implication, yes. I find a rising market without a pullback endlessly confusing but it is what it is.

    The market likes a weaker dollar because large multi-national countries benefit from it and it helps our swelling debt to foreign nations a bit.

    But the intermarket relationships are temporarily out of whack it seems thanks to all this governmental stimulation.

  3. pikertrader Says:

    hey corey,
    I originally had peg the USD as breaking out of a ascending triangle, was this 86 as the top, was this a wrong assessment?

  4. Corey Rosenbloom Says:

    No, it wasn’t wrong, and I saw that too, but I’ve been bearish on the Dollar for a variety of reasons and the Cradle Sell trade occurred just prior.

    Plus, there was a valid ascending triangle breakout to the upside which has now officially become a “Bull Trap” and that forecasts a larger than expected move to the downside with longs trapped and taking their stops all the way down (should we continue down).

    We’ll see what happens but at this snapshot in time, it looks bearish for the Dollar short-term.

  5. Tan Haw Swee Says:

    Corey,

    tell me more about the copper futures for the next few weeks to come, Thank you

  6. Neil Says:

    Corey …. Intresting post …. well if this all sums up, then it should be intresting to look at the commodity charts, esp. gold and silver. And u would be knowing that gold has bounced off the 200 sma.

  7. Andrew Stanton Says:

    Might be interesting to post a daily chart with the Dollar, oil, and gold together.

  8. Terry Says:

    I would like to see a SPY in the dollar index instead of dollars. The USD dolar jumped when the market fell. The effect to foreigners was not the same. The SPY goes up a lot the dollar goes down a lot. I wonder with the amount of foreingers in the US market these days – if the elliot wave interpretaion is different in the dollar index or the CDN dollar to be specific.

  9. Corey Rosenbloom Says:

    Tan,

    Will do! I’d posted earlier when copper came into resistance and we had an inflection move down. Now, that down move may have run its course. I’ll post it today.

  10. Corey Rosenbloom Says:

    Neil,

    Precisely – and gold has formed a positive divergence and looks poised to head higher. It’s bounced off its daily 50 as well. Quite bullish.

  11. Anonymous Says:

    /dx the dollar futures has not broken the bear flag

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