US Dollar Index Pulls Back to the Cradle

Mar 30, 2009: 7:42 PM CST

The US Dollar Index is on the balance of a precipice, the resolution of which will determine its short-term structure.  Right now, the Dollar Index has formed and now retraced back into the Cradle Crossover Zone.  Let’s see all this on the Daily Chart:

Until recently, the Dollar was in a strong uptrend, which was halted by a sudden retracement from $89 to $78 into the final months of 2008.  Since then, the Index has made a new high above $89 again, but it can’t seem to hold ground at this level (much like Gold can’t seem to hold above $1,000).

I state that the Dollar is at a ‘precipice’ particularly because it has reached a “Decision Node” that will determine the structure going forward.  If price breaks above $86, then we’ll almost certainly see a run to test now highs.

However, at this point, it appears like the Confluence Resistance at $86 may be a bit too much to overcome.

We see that the 20 and 50 EMAs have formed the “Cradle,” which sets up at the price point where the 20 EMA crosses under (or above) the 50 EMA.  The “Cradle Trade” forms when price (which has broken beneath the averages to cause the cross) rallies back into this confluence (or crossover) point to challenge it as resistance.

More times than not, I’ve observed that the Cradle holds, and price is rejected and that’s what sets up the “Cradle Trade,” which calls for a tight stop to be placed just beyond the crossover confluence level.

In this case, we also have the 50.0% Fibonacci Retracement coming into play at this level, which served as the intraday high of the day.

A Spinning Top Candle (almost a doji) has formed at the confluence resistance level.

It’s not to say that price can’t overcome the $86 level, but it would be remarkably bullish if it did so.

Corey Rosenbloom
Afraid to Trade.com

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10 Comments

10 Responses to “US Dollar Index Pulls Back to the Cradle”

  1. Anonymous Says:

    Nice analysis

    Thanks !

  2. DaveB Says:

    Looks like a possible bear flag into confluence resistance…

  3. Anonymous Says:

    So, would you say that there are two potential trades here? First short with a tight stop above the confluence level and second to reverse if the stop get taken out and we get “remarkably bullish”

  4. Corey Rosenbloom Says:

    Dave,

    It does resemble that! The flag might give us a price projection point as well.

  5. Anonymous Says:

    do you normal use exponential moving average or simple moving average for cradle. and if your bearish on dollar then your bullish on gold and silver i assume correct?

  6. Corey Rosenbloom Says:

    Anon,

    Perhaps, depending on your risk tolerance.

    A la Mark Douglas’s “Trading in the Zone,” it’s often best to find key inflection points, maybe where you don’t know exactly what’s about to happen, but that it won’t take much to know. Either way you chose, there will be a tight stop relative to the potential reward from the trade.

  7. Charles Says:

    @comment #5– read Corey’s post

  8. Corey Rosenbloom Says:

    20 EMA
    50 EMA
    200 SMA

    I’m just looking for low-risk inflection points to enter trades that have superior risk/reward.

    But for now, gold is at trendline and EMA support and the Dollar is at Cradle resistance. Until those levels are broken, I expect gold to rally and dollar to fall short term. The price is small (stop-loss) to find out if wrong.

  9. Serge Says:

    Looks like it’s forming a huge rising wedge…

  10. Corey Rosenbloom Says:

    Serge,

    Good point! I just can’t put my finger on a proper term but you might be precisely right with a wedge. It just ‘feels’ bearish to me.