US Dollar Index
One of the easiest ways to pay attention to how the US dollar is doing is to simply follow the US Dollar Index. Looking at the chart, you can see that we ended up forming a bit of a hammer shaped candle for the Friday session, just above the 50 day exponential moving average (EMA).
That of course is a very bullish sign, but if we were to break down below the bottom of this candlestick, it suddenly becomes a “hanging man”, which of course is a very bearish sign. Overall, the US dollar has gained for a couple of years in a relatively well-defined channel.
One of the first places you will see the US dollar move another asset is in gold. After all, gold is denominated in the same US dollars, and traders will often look to gold markets to protect themselves from dollar depreciation.
Recently, we have seen gold bounce around the $1300 level. You can see on the attached four hour chart that there seems to be a lot of buying interest between $1290 and $1300. There are three circles on the chart showing where this has happened recently.
If the US dollar were to gain strength, we could see gold break down below the important support level. If that’s the case, the gold markets could find themselves looking towards $1275 level, and then even the $1250 level.
This is just one of the markets I will be paying attention to in relation to the US dollar.
The EUR/USD pair has been beaten down rather significantly as the US dollar has strengthened against almost everything. It is important to note that the EUR/USD pair is over half of the US Dollar Index.
Looking at the chart, it’s obvious that the 1.12 level has been significant support in the past, so it makes sense that we will continue to see a lot of interest in this area, as it is the 61.8% Fibonacci retracement level of the larger and longer-term move, as well as a scene of massive demand previously.
It is because of this that we should be watching this currency pair because if the 1.12 level holds rather significantly, it’s likely that the US dollar will fall against almost everything, lifting the previously mentioned gold market, and possibly driving the EUR/USD pair back towards the 1.14 handle.
The S&P 500 has done reasonably well considering the strength in the US dollar. Given enough time, we often see a negative correlation between the two markets.
That being the case, it’s very likely that the markets will come to a resolution one way or the other. Eventually, the US dollar works against the S&P 500 but ironically in the short term that may be one of the drivers of the US dollar, as people put money to work in US equities as there is no other viable alternative right now. It’s a hard correlation to follow at times, because it can change in its meaning depending on other global macro factors.
The take away
The main take away from this is that the US dollar is going to hold the spotlight this coming week, and could tell you where assets are being directed. Which market you choose to play is entirely up to you, but the main take away is that you should let the US dollar guide your trades in those other markets.
Simply put, some of the most important things that professional traders will look for is what the fundamental assets are doing. The most fundamental asset without a doubt is going to be the greenback as most things are traded against it.
This will be true whether it’s a stock, and Index, a commodity, or of course other foreign currencies. By paying attention to how it is behaving, quite often you can formulate better longer-term trading positions.
While many of these assets can move on their own, depending on the circumstance, as a basic underlying filter, you need to pay attention to the US dollar.
You should do more analysis before putting money to work, however, and uderstanding where the currency that you are trading against is going is your first step. Then you can focus on things like industrial demand for a commodity, earnings for a stock, or other such inputs.
Alexander Voigt, founder of daytradingz.com