The US Dollar Index ($USD) showed signs of life recently, forming a potential short-term reversal pattern. Let’s look:
The Index formed an all-time low just beneath 71 on March 17th before reversing upwards to form a semi-hammer (or long-legged doji) pattern which can mark reversal points in a market.
Following the doji reversal, price rallied sharply to test the falling 20 period moving average before inflecting back down, but price has now formed a Failure Test of the lows.
Failure Tests occur when price is anticipated to test a prior zone but fails to reach that zone, but reverses ahead of the actual test. The market is said to have “failed” the test, and these can sometimes serve as early indications of a potential trend reversal.
Also, the failure test has set up a positive momentum divergence, which has carried price back to its target of the falling 20 period moving average.
The whole action from late March has created a type of symmetrical triangle, which is a further indication of market consolidation. Often, the longer the consolidation, the more likely a pattern is to be a reversal pattern (keep in mind we are just beginning a period of consolidation so don’t expect too much action too quickly).
With commodity prices (especially gold and oil) falling over 10% recently, a stronger dollar would play in to this inter-market relationship quite nicely. In other words, if these commodities are showing ‘topping’ patterns (which some analysts believe they are) and the US Dollar Index showing a potential reversal pattern (to the upside), then this would mark a key shift in Inter-market Analysis.
Adam Hewison of therecently released a trade signal video on FOREX (Foreign Exchange) analysis of the both the Euro/US Dollar and the British Pound/US Dollar and highlighted a couple of new trading signals, one of which is a sell-signal for the Pound (which actually translates into a Buy Signal for the US Dollar).
He actually relased two educational videos:
Even if you’re new at FOREX insights, Adam does a good job of simplifying what the relationships mean and what a shift in these trends may mean for the broader market.
Recall that a significant shift in the downtrend of the US Dollar Index will have profound affects across not only US markets, but also global futures markets (especially commodities) and potentially global stock markets. If this is really a true shift, it would help your account to try to be as early as possible and receive as much confirmation you need to adjust yourself and your accounts accordingly.
Whether or not you trade any of the markets listed above, it is still crucial to know what the trend of the US Dollar is and how shifts can affect markets or stocks that you do trade.