If I was in a writing mood, I could write a very interesting book full of Wyckoff lessons about the short-term price actions, which can be found on the Daily December Dollar Index chart [above]. Instead, keeping it simple, and defaulting to the larger, developing story - while ignoring the collection of shorter-term price actions that created the larger story – the larger decline in the Dollar Index, since the January 2017 high, started trying to bottom, after the low on Wednesday 8-02-17. Finally, after several false starts, daily price action indicates a bottom on 9-08-17, but “a bottom of what degree?”
Clearly, the low on 9-08-17 has become an important short-term low. The 9-08-17 low has been followed by a good rally, but nonetheless, will the 9-08-17 low become an important longer-term low? Which is to ask, “Will forthcoming price action “confirm” the progress achieved by the recent short-term rally, indicating that the rally will continue to develop the needed additional price action, creating the legs for further price gains?”
As background, I will digress, for a minute, to the macro/longer-term price action [fundamentals], which have been the macro-catalyst, creating long-term and recent price action. Remember, although it is “all one trade” in macro-terms, intermediate-term price action, in different markets, often represents a choice between which asset class the composite man currently thinks will produce the greater return during his period of shorter-term investment within the intermediate-term adjustments to the macro-trend. We can surmise that these investment choices are made by big money, which is often burdened by size / lack of flexibility. Nonetheless, big money must position funds, within the developing macro-trends, as shorter-term trends develop, because these shorter-term trends form the longer-term trends, and therefore, determine the timing within longer-term and intermediate-term trends / time frames.
As forecast in the “Inflation, Reflation, Deflation” article published in Modern Trader [June 2016], long-term price action, in multiple markets, has already proven that reflation has worked. The U.S. stock market has continued to rally. As expected, 30-year bond prices peaked in July 2016, and have since fallen. Gold prices have bottomed and subsequently, gold prices have entered the expected trading range. Domestic and global equities/economies have or are recovering. Other asset classes have formed or are forming, bottoms. Importantly, unemployment has declined to very low levels, which, historically, has required/enabled the Fed to raise rates. Remember, to contain deflation, reflation required low rates/low yields, as stimulus to offset deflation. Reflation, having worked, requires/desires rising rates, corresponding to acceptable rising levels of inflation. If the pieces of the “acceptable inflation pie” will continue to come together, as desired, the Fed would be expected to continue to raise rates.
Rates, which rise at the correct pace, support the price of a currency. Therefore, the fundamental background has shifted forward on the “deflation, reflation, inflation curve.” Current fundamentals have transitioned to creating acceptable inflation growth, and therefore, expectations have transitioned and become about the need and pace of forthcoming rate increases, which is to say; “current fundamentals have become about continued economic growth/low unemployment, which creates acceptable levels of inflation, allowing the Fed to appropriately raise rates.” This scenario leads to the “Don’t fight the FED,” dictum, but does this fundamental trading concept currently apply to price action in the Dollar Index?
Viewing the chart for the Dollar Index, as composed of areas of short-term price actions, which, when combined, form a larger and more important whole, the question for technical analysis to answer has become: “Did the rally, which started on Friday 10-13-17 and recently peaked on Friday 10-27-17, end the rally that started at the low on 9-08-17?” If the high on 10-27-17 is not a final high to the recent rally, prices, having declined in the short-term, are currently within the “area” where forthcoming price action would be expected to find support, and if successful, turn prices upward. Importantly to technical analysis, price action [price and volume relationships and form] - within the week that starts on Monday, 11-13-17 - has acquired a key role in both the short-term and intermediate-term trends / time frames, which should impact the timing and direction of larger forthcoming trends.
Interestingly, prices in gold and 30-year bonds, both, took hits and declined on Friday 11-10-17. Importantly, this renewed weakness in price action, in both markets, developed in the area, which should lead to lower prices in each. Lower prices, in these two markets, at this time, would appear to affirm that these two markets are anticipating the negative future impact of rate increases to their prices. Therefore, if prices in the Dollar Index can hold and rally, along with continuing weak price action in bonds and gold, the combined price actions, in all three markets, would potentially indicate that larger changes in prices for all three markets are probable, and additionally, these combined changes in prices should currently be in response to expectations about the Federal Reserve’s future rate decisions. Fundamentally, at this point in the reflation cycle, rising rates could/should be considered negative for gold and bond prices, but potentially positive for current and forthcoming price action in the Dollar Index. Importantly, forthcoming price action in the Dollar Index, during the week starting on Monday 11-13-17, should soon bring “technical clarity” to these fundamental questions.