The Dollar Index rolls over

August 22, 2016 11:36 AM

As a Wyckoff trader, who trades markets using my interpretation of “technical analysis” to find trades with both short-term and long-term potential, I have always kept my eye on the U.S. Dollar Index. I do it to find trades, but importantly, I also do it to stay abreast of the always developing and, therefore, always changing but interesting “technical interpretation” of the global economic story.

Price action in this currency is often an excellent long-term indicator of future global economic trends. Of course, the immediate trade and its potential is frequently more important to a technical trader than the developing long-term economic story. Nonetheless, importantly and perhaps ironically, future economic events almost always develop, as the price action has indicated, to confirm projected price action at critical price points. Therefore, understanding the technical influences plus the developing economic story is often beneficial to future decision making, as long as the trader has the ability to separate the two approaches, when the near-term developing chart story appears to be in conflict with the current, but developing, long-term economic story. 

As background, referring to the below chart [25-year Dollar Index, monthly], the Dollar Index peaked in 2001 and started a long-term decline. The decline in the Dollar Index bottomed in 2008 because the U. S. sub-prime crises was becoming a global issue. A “flight to quality” rally in the Dollar Index in 2008 recovered most of the depreciation of the last down leg [2006 to 2008] of the larger decline which had started from the 2001 high.

Technically, the rally from the low in 2008 is called an “automatic rally” by Wyckoff technicians. The automatic rally is usually the prelude to the development of a trading range which can evolve into either a new long-term bull market rally, or instead, a corrective rally within a much larger [macro] bear market. Either potential, long-term bullish or longer-term [macro] bearish, should be preceded by the expected trading range. Afterward, the near-term trading range often ends with the potential for an important rally, even if the expected rally is destined to become a macro corrective rally within a larger trading range (i.e. a trading range within a larger trading range) leading to an eventual decline.

As we see, the expected trading range lasted until mid – 2014. In Wyckoff terms, the long-term trading range had evolved after multiple, friendly “secondary retests.” The friendly retests resulted in a bullish “springboard” position in mid–2014 (i.e. monthly price ranges that had become “tight” because, due to the absence of selling, the composite man was nearing the end of his “accumulation.”) The indication in mid–-2014, due to the absence of supply, had become: prices are ready to rally! They did!! 

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About the Author

Robert Burgess has been a broker and trader, and published the Burgess Technical View, a newsletter featuring his technical views on stocks, bonds and commodities, which developed an extensive subscribership, which included large financial institutions, pension funds, and Fortune 500 companies.  He continues to keep a watchful eye on markets.