Dollar Index and the forthcoming inflection point

September 2, 2016 09:56 AM

Price action ended the July 2016 trading (i.e., the response to the May spring) with a clear indication that prices were headed toward an important long term “inflection point.” Additionally, because of the preceding poor price action within the new trading range following its development after the January 2015 high--and importantly, after the “retest” and “lower high” in December 2015--a bearish bias had been created. 

Following the December 2015 retest, the monthly price action--within the new trading range--established the potential for the very important “back up to the creek” to fail (i.e., the creek that was jumped by the rally in 2014). If prices fail to successfully complete the required step of backing up to the creek, then the macro analysis, which has been positive since mid-2014 would become bearish. because, in macro terms, the rally, from the low in 2008 to the high in January 2015, could become a macro “corrective rally” to the decline in prices from the high in 2001 to the low in 2008.         

The low in May 2016 is a spring, a spring that completes a back up to the creek, which the low in May had the potential to do--and which is a potentially very bullish price action. Therefore, prices are expected to rally, which they have done. Nonetheless, the really important question is whether or not the May low completed a back up to the creek, or instead, was the price action transitory, leaving the back up to the creek question. That is still to be determined.

The May low had been retested in late June.  Subsequently, prices rallied.  Of course, the rally is a response to the Brexit vote, but importantly, the Wyckoff trader never cares “why.”  He only cares “how.”  As prices traded higher in July, the daily price and volume characteristics became suspect.  These daily indications were confirmed in late July, when prices rolled over and the monthly price bar closed unchanged.  Therefore, the monthly price bar and close indicated that prices had run out of demand.  The trading question had become: how much supply would enter the market and how fast?

Referring to the daily bar chart, one sees that the initial rally in August failed where supply had previously entered the market in late July.  A red downtrend, which is within the green uptrend from the May / spring low, can be drawn. Prices started to trade lower.  Prices broke easily on Tuesday August 16th on increased volume as prices declined to new lows for August. Price action in August had created an initial rally, but importantly, the rally had reversed intra-month when prices rolled over. Nonetheless, volume diminishes on Thursday the 18th as prices reach the green trend-line, which is drawn using the low of the May spring and its retest / higher support in June.  This combination of daily price action should produce at least a near term bounce. Prices turn up, the next day, on Friday, Aug. 19.  

Shifting the analysis to the weekly bar chart, the weekly price bar that ended on Friday the 19th has a reasonably wide downside range for the week, indicating the expected price weakness, but nonetheless, the daily price action had started to indicate that selling pressure could be diminishing. The monthly price action is weak as a whole [August is not over], but if the short term daily price actions  start to become stronger, a decision about whether to remain bearish, at this point, will need to be considered.  

Because the short term price actions are developing within the short term [red] downtrend, which is within the new longer term trading range, any short term decision can become a complicated decision with longer term consequences. Ideally, any bounce, which follows Thursday's [18th] low, will peak at or around the low for the July price bar [i.e. become a transitory, short term price action] and then turn down, while price action remains within the red downtrend channel. Additionally while analyzing forthcoming price action , the trader must be more careful than usual, due to the potential for the current price action either to become a more important retest of the May spring, or for forthcoming price action to create a better than expected bounce.   

Page 1 of 2
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.