• 657 days Will The ECB Continue To Hike Rates?
  • 657 days Forbes: Aramco Remains Largest Company In The Middle East
  • 659 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,059 days Could Crypto Overtake Traditional Investment?
  • 1,064 days Americans Still Quitting Jobs At Record Pace
  • 1,066 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,069 days Is The Dollar Too Strong?
  • 1,069 days Big Tech Disappoints Investors on Earnings Calls
  • 1,070 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,072 days China Is Quietly Trying To Distance Itself From Russia
  • 1,072 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,076 days Crypto Investors Won Big In 2021
  • 1,076 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,077 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,079 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,080 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,083 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,084 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,084 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,086 days Are NFTs About To Take Over Gaming?
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Strong U.S. Dollar Weighs On Blue Chip Earnings

Strong U.S. Dollar Weighs On Blue Chip Earnings

Earnings season is well underway,…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

The Dollar Index: High Risk of Unraveling

I am sure that you are aware that the Dollar Index can't get a bid. This isn't news but a fact. The Dollar Index is in a down trend, and the question to ponder is: how low can it go? Looking at the price patterns, I believe the Dollar is at significant risk of unraveling.

Figure 1 is a weekly chart of the Dollar Index (symbol: $DXY). The black dots over the price bars are pivot points, and as we can see, price closed last week below the two most recent pivot points (labeled 1 and 2). To understand the significance of this occurrence, let's design a study where we sell short the Dollar Index when the Dollar Index closes below two weekly pivot points. We will exit our positions after holding for 13 weeks. Commissions and slippage are not considered, and all signals are executed at the close. We will be looking at price data going back to 1974. The purpose here isn't to design a trading strategy, but to understand how the current price action could lead to a significant decline in the Dollar Index over the next 13 weeks.

Figure 1. $DXY/ weekly
$DXY/ weekly

Since 1974, this strategy produced 53 trades with 66% being profitable. The strategy generated 84 Dollar Index points; over this time period, the Dollar Index has lost a negative 22 points. The equity curve for this strategy is shown in figure 2, and essentially, this is the type of equity curve that you want to see when designing a strategy -- a nice persistent, consistent upward sloping rise.

Figure 2. Equity Curve
Equity Curve

But as stated, we aren't trying to design a trading strategy, but we would like to determine when the Dollar Index might be at risk for sustainable and significant losses. To do this we need to look at the maximum favorable excursion (MFE) graph (see figure 3) from this strategy.

Figure 3. MFE graph
MFE graph

What is MFE? MFE looks at every trade from a strategy, and it assesses how far a trade moved in a profitable direction before being closed out for a profit or a loss. Looking at the trade inside the blue box in figure 3, we note that it had a run up or profit of 4.7% (x- axis) but it was closed out for a 1.4% loss (y- axis). We know that it was a losing trade because the caret is red. So what is the MFE graph for this strategy telling us? 18 out of the 53 trades (33%) had an MFE over 5%. (This is to the right of the orange line on the graph.) In other words, 13 weeks after this pattern is recognized, there is a 33% chance of a significant loss in the Dollar Index.

Rather than using a time stop (i.e., 13 weeks), let's cover our positions when price closes above two prior pivot points. This is the mirror image of our entry, and in this case, we are letting price (not time) take us out of the market. In this strategy, there were 28 trades and 64% were profitable. This strategy yielded 95 $DXY points since 1974. The average trade lasted 27 weeks, which is twice as long as the above study. If you remain in the market longer and allow price to take you out of the market, you get the MFE graph shown in figure 4.

Figure 4. MFE graph
MFE graph

13 out 28 trades had an MFE (or run up) greater than 7.5%. (This is to the right of the orange line). 9 out of 28 trades had an MFE greater than 10%.

So what is the bottom line? A close below two pivot points on a weekly chart puts the Dollar Index at a high risk of unraveling.

Later in the week, I will have more on the Dollar Index, plus I will consider the impact of a falling Dollar on equities and commodities.

 

Back to homepage

Leave a comment

Leave a comment