Chart Of The Day: Why The Dollar Is Set To Continue Even Higher

The dollar index is advancing for the third straight day, ahead of today's ADP nonfarm payroll report and the ISM non-manufacturing PMI release as well as Friday's nonfarm payrolls.

While traders may be tempted to interpret this rise as a sign of faith in the economy, it's actually more likely to be a reaction to increasing indications from foreign central banks of their willingness to cut rates if necessary, to help their economies withstand the impact of the spread of the coronavirus.

DXY Daily Chart

Having said that, the advance extended the greenback’s weekly upside, taking on last Wednesday’s highest peak in the short-term uptrend since the Dec. 31 bottom. From that point it has since been trading within a rising channel. Note how the previous, Dec. 12 low turned from a support to a resistance after failing on Dec. 27 to keep prices higher: the short-term rising channel broke free of the medium-term falling channel since the Oct. 1 high.

DXY Weekly Chart

When taking a longer view, it's evident that the medium-term falling channel is in fact a falling wedge, bullish after the preceding advance. The wedge’s upside breakout signals a resumption of the rising channel since July 2018.

The weekly price bounced above the 50 WMA, as the 100 WMA crossed above the 200 WMA. There, it joined the 50 WMA in a bullish MA formation — in which shorter MA’s accelerate at a faster rate than longer ones, reflecting an overall strengthening of the index.

The only thing that worries us is a negative pergence triggered by the RSI, which has been falling against the price, suggesting waning momentum. An upside breakout above 60 would likely project excitement among dollar bulls.

Trading Strategies

Conservative traders would wait for the dollar to cross the 98.50 resistance since November, then wait for the pullback to retest it and join the uptrend.

Moderate traders would be happy with a new high in the short-term uptrend — with a price higher than the June 29, 98.19, high — and then a return move for a tighter stop loss, not necessarily to test the trend.

Aggressive traders are likely to jump in on any dip.

Trade Sample

  • Entry: 97.75
  • Stop-Loss: 97.50
  • Risk: 25 pips
  • Target: 98.50
  • Reward: 75 pips
  • Risk:Reward Ratio: 1:3
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