Thursday, May 19, 2011

Friday Dollar Analysis

Two weeks ago, I wrote the following about the dollar:

The dollar may be in a position for a technical rebound. Last week there was very little action lower, with prices instead moving in a rounding pattern. There has been a large volume spike over the last week, which may be the sign of a selling climax. Also note the gap higher today and the very strong candle print. There was a strong fundamental reason for the change of direction: dovish statements from the ECB regarding interest rates. I'm suspecting that some of today's action was also some short covering.


The idea of a rebound trade does not mean that the fundamental downward trend that is in place is in any danger of being broken. Prices have still moved through important long-term support levels indicating a strong move lower is already taking place. What is happening is a simple "profit taking" of the shorts. Given the underlying interest rate and fundamental issues underlying each currency, I don't see any reason to the dollar is in danger of a strong rally at this point. But, if you're shorting the market, I would consider taking some profits off the table right now.

Then blogger went down, so I didn't post anything last week. Let's take a look at the chart to see what has transpired since then.

Basically, I felt the chart indicated we would see a technical trade with the dollar bouncing higher, but little change to the overall, underlying trend. So far, that is what has happened. The dollar caught a safety bid as concern over the EU situation made the dollar a more attractive asset. Prices have bounced up and hit resistance at the 50 day EMA and have moved a touch lower since.

The EMAs are sending the following signal. The shorter EMAs (the 10 and 20) are moving higher and the 10 has moved through the 20. Also note the 50 day EMA is now moving sideways. There is a fair chance we will see one of the shorter EMAs cross the 50 over the next few weeks. These are preliminary signals of a change, but one that is not confirmed yet.

However, take note of the longer trend:

The longer trend is still lower; the recent bump is (so far) a blip in the longer trend.

My general feeling about the dollar is the following:

Right now, we're in the middle of a technical bounce higher so far has not disrupted the overall trend. A strong move above the 50 day EMA over the next week or so will change that. In addition, if we see important technical crossings (the 10 or 20 moving over the 50) a re-evaluation will be necessary as well. However, if you played the technical bounce, I'd take money off the table now and wait to see how the market plays out. Ultimately, I'd still be looking for a longer shorting opportunity.