Ideally, we'd see the dollar in a relief rally sometime over the next week or so to provide confirmation of the downside break-out. This is when I'd go short.The dollar has been consolidating in a triangle pattern for the last few months. Last week, it broke to the downside. The ideal trade in this situation is to wait until the chart retests key technical levels and then trade in the direction of the break-out move. In practical terms, that means to wait until the index rallies into previous resistance, and then go short.
Let's take a look at the chart:
Last week, the vast majority of the price action occurred around the 21.10, 21.15 level. Prices dropped to the 20.90 level on Wednesday in reaction to the debt ceiling debate and poor economic numbers, but then rallied on Thursday and Friday, returning to the week's previous levels.
The daily chart shows prices have rallied into previous support. Also note the now bearish orientation of the EMAs -- the shorter are below the longer and all are moving lower. Prices have now found resistance at these levels. Also note the strength of the upward bars on the chart.
The dollar is being pulled from two distinct directions right now. On one hand, the debt debate and weak economic numbers are adding downward pressure to the index. On the other hand, the dollar is still considered a safe haven in times of distress. While we focus on our little legislative drama, remember that the EU situation continues to add further stress to the world's economies, thereby creating a bid for the dollar.
