Recently, there's been a plethora of articles about the demise of the US dollar's position as the global reserve currency. We've written about this potentiality as well.
However, while anything is possible, to be completely honest, we're not betting on king dollar being unseated just yet. Still, the abundance of such reports, along with an unprecedented 'attack' by the Fed which is weakening the USD—driven by near-zero interest rates and “infinite QE”—have brought about an extreme level of dollar short positions.
Contrarian thinking, something we generally aim for, would dictate this is therefore the time to go long on the greenback—or at least remain on the sides—until such positioning presumably peaks.
However, the trading pattern since our previous USD-focused post only reaffirms our position. The release last week of the FOMC minutes prompted a risk-off related dollar short squeeze along with increased demand for Treasuries. That fueled the sharpest daily advance for the dollar in over two months.
And that was the fundamental trigger for the return move that followed a downside breakout of a bearish pennant.
Despite the newfound demand for the US currency, the pennant maintained its integrity, as the sellers who drowned out all demand within the pennant reduced their offers in order to find more discerning buyers, at lower prices. Supply is keeping prices at bay for a fifth day, forming a rising flag, bearish after five continuous days where the buck was sold off—forming back-to-back bearish patterns.
The pennant/flag pattern combo is reaffirming the sharper angle of the downtrend, as demonstrated in the new falling channel. Note, the flag requires a downside breakout to be complete.
Today’s decline will confirm, on a closing basis, Monday’s hanging man—which after finding resistance by the flag provides a more powerful signal.
Traders right now are waiting to hear from Fed Chair Jerome Powell on Thursday, in what could be a “profoundly consequential’ speech in which the Fed would upend a decades-long policy on capping inflation, in order to allow inflation to rise, after having failed to boost prices for over a decade, which could buttress the economy.
Such a new policy position would reduce the buying power of the dollar, thereby pushing its value lower, in accordance with the above chart.
Trading Strategies – Short Position
Conservative traders would wait for a downside breakout of the rising flag.
Moderate traders are likely to wait for the closing price, to confirm yesterday’s hanging man with a close below the hanging man’s body... below 93.20.
Aggressive traders may short now, relying on the pennant’s resistance.
Trade Sample
- Entry: 93.00
- Stop-Loss: 93.50 – above Friday’s high
- Risk: 50 pips
- Target: 90.00
- Reward: 300 pips
- Risk:Reward Ratio: 1:6
Note: This is only a sample, not a lesson. That’s what the post is for. If you didn’t read and understand it, this sample is not for you. It is only meant to demonstrate the key points of a coherent trade plan. The sample is just one trade possibility, whose success is impossible to predict on an individual basis but statistically. The sample is generic, and thus not suitable for every trade. One should use the parameters to tailor the plan according to one's personal budget, timing and risk-tolerance characteristics.