• 399 days Will The ECB Continue To Hike Rates?
  • 399 days Forbes: Aramco Remains Largest Company In The Middle East
  • 401 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 801 days Could Crypto Overtake Traditional Investment?
  • 806 days Americans Still Quitting Jobs At Record Pace
  • 808 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 811 days Is The Dollar Too Strong?
  • 811 days Big Tech Disappoints Investors on Earnings Calls
  • 812 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 814 days China Is Quietly Trying To Distance Itself From Russia
  • 814 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 818 days Crypto Investors Won Big In 2021
  • 818 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 819 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 821 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 822 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 825 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 826 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 826 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 828 days Are NFTs About To Take Over Gaming?
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

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

Very Dangerous Time For Dollar Index

I don't want to get into the prediction game or even be the first one to say, "I told you so", but I believe the Dollar Index (symbol: $DXY) has a very high likelihood of embarking on a major down swing in the coming weeks.

I am making this observation based upon a simple chart pattern. See figure 1 a weekly chart of the Dollar Index. This is the same chart that I posted on May 29, 2009 in the commentary, "5 Reasons To Be Bullish On Gold".

Figure 1. $DXY/ weekly

The black dots represent pivot points, and the red line is a simple 40 week moving average. The recent up swing (i.e., last 2-3 weeks) is likely to leave a pivot point on the chart at $79.50. If prices close below this pivot point on a weekly closing basis, then this would represent a close below 3 pivot points, and this is the pattern that I believe would be very ominous for the Dollar Index.

How ominous? Let's ask the following question: what happens to the Dollar Index when prices close below 3 pivot points? To answer this question, we will construct a strategy where we short (i.e., bet against) the Dollar Index when this occurs, and we will cover our positions on any close above the 40 week moving average.

Since 1980, there have been 14 unique instances (or trades) when prices closed below 3 pivot points. While a close below 3 pivot points has merit as a trading strategy, my goal here isn't to develop a strategy, but to warn of the potential down side that such an event can mark. So let's look at each individual trade in this strategy, and you will then understand how low the Dollar can potentially go.

To look at each trade, we will introduce a concept called Maximum Favorable Excursion or MFE. MFE measures in percentage terms how far a trade can go in your favor before it is closed out for a loss or a win. For example, look at the MFE graph from our "close below 3 pivot points strategy" in the Dollar Index. Remember we are shorting the Dollar Index here. See figure 2. The green caret within the blue box represents one trade. This trade ran up about 9% (x-axis) and was closed out for a 2% gain (y-axis). We know this trade was a winner because it is a green caret.

Figure 2. MFE

Looking at the graph, we see that 4 of the 14 short trades ran up greater than 14% before being closed out; these are the carets to the right of the blue vertical line. So think about that for a second. You short the Dollar Index based upon this pattern, and you have a 28% chance (4/14) of seeing prices fall significantly.

Taking it one step further, we see that 12 out of the 14 trades had an MFE greater than 5%; this is to the right of the red line. In other words, if there is a close below the 3 pivots, then there is an 85% chance (12/14) that the Dollar Index should fall at least 5%.

So when I state above that "I believe the Dollar Index (symbol: $DXY) has a very high likelihood of embarking on a major down swing in the coming weeks", I am basing this comment on these observations.

 

Back to homepage

Leave a comment

Leave a comment