Has the US Dollar Changed Trend?

In a previous commentary I noted that markets can change trend around holidays and last week I went through how options provided low risk protection for hedging or speculation. That option play has proved very timely, as the US dollar has strengthened considerably over the past week. The perception from a previous post that any eurodollar strength would prove to be a false dawn has come to fruition. The question is now whether this change in trend can extend in both price and duration.

In order to quantify this, I use the method of linking price and time of the previous downtrend in the US dollar to identify key levels that will tell me if the short term, intermediate, and major trend are all now up. The primary tool for examining this is the use of a chart type called ‘market profile’. Developed in the mid-1980s as a day trading tool for futures, the methods and techniques associated with market profile have developed over the intervening decades. Its unique feature is that it links price, time, and volume together in one picture. While the theories and uses of a profile can be deep and complex, for the purposes of identifying major points in a market, the principles are simple. The amount of time price stays within an area dictates the contentment of all market participants and therefore represents fair value. The longer the time spent, the more important its relevance. When price trends, this represents the time when price is deemed to be unfair and the length of time of the trend in relation to movement provides the reference points for when the market should both pause and accelerate. The breaches of these points in the previous trend by the current trend provide the understanding of what the short, intermediate and major trend is.

Figure 1 shows two segments of time. The first is from the downtrend that began in June last year. The second is from uptrend that began at the beginning of this month. Any long trend will have smaller distinct trends within the overall trend. These normally extend to three separate areas that are defined by where one block of time and fair value ends and another begins. These are defined as the relatively small amount of time below the final line and then two areas above. The current trend, from the May lows, is now within the second area of the previous trend. This means that the current rally is more than a simple correction and that the intermediate trend is now up. It would have to make a weekly close below the final line at the bottom to state the downtrend was restarting. In order for the major trend to switch up, it would have to close beyond the point of most time above the middle line. Therefore, those who need to consider their risk against US dollar strength or commodity weakness must take action.

Figure 1: Example of a Recent Downtrend and Uptrend

Source: CQG


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Mark Carney Bank of England