Timing the Dollar Index

As a broker, I get calls from clients everyday asking me what I think about this market or that market. Given the generic nature of the question, my first response is almost always, “What’s your timeframe?” It always amazes what a stumbling block this can be. The old saying is, “Plan your trade and trade your plan.” This week, we’ll look briefly at the importance of timeframes in trading the Dollar Index.

As we all know, the Dollar has been in major rally mode for almost a year now and is still up around 10% for calendar year 2015. Major trend traders have profited handsomely by the Dollar’s steady move higher. However, we saw trouble looming on the horizon in March as the Dollar made its highs for the move. We noticed that the commercial traders had set a new record short position ahead of the March 17th FOMC meeting which you can see on the long-term Dollar Index chart. We saw this as a major warning due the commercial traders’ knack for being in their biggest positions at the most crucial moments in major market moves.

The Dollar Index has traded in about a 5% range from the March 13th highs down to the major technical support that has built up between 93.50 and 95.50. The markets have been rebalancing themselves since the Fed’s meeting and the recent decline has brought in some commercial buying. Moving to the second chart, you can see why we track both the total net commercial trader position as well as the commercial traders’ momentum. Even though commercial traders remain heavily net short, their recent purchases have been strong enough to shift their momentum back to the positive side. We only trade in the same direction as the commercial traders’ momentum which puts their purchasing power behind our trading.

Given the recent shift in commercial trader momentum along with the Dollar’s decline to test the technical support, we see this as a short-term buying opportunity using Thursday’s low of 94.47 as a protective stop point. Time will tell if last month’s action created the top or whether the current buying opportunity will push the market to new highs.

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