Let’s look further into the use of the trend lines as map for projecting areas of alerts. In the following chart the Day candles are shown with an Outer Trend line starting at the low and connecting to the next high on February 8th. This means the line could be drawn only after February 8th. We have another Outer trend line that starts December 29th and connects to the low on January 28th. These lines create an alert to be on watch for a breakdown. Notice that we do not have to be that precise. The value of being able to draw the line is to be able to project into the future where the geometry of the market would challenge the bulls. The Inner Trend line connecting the Low on February 23 to the next high on February 25th provided an early alert on where the momentum up for the Dollar Index would be tested. The probing and break of this inner trend line is a key signature of dollar bull weakness. The probing of that line on March that line on March 4th and its breaking on March 6th, 7th, and 8th was the beginning of the breakdown of the upper channel. Here are two views of these trend lines to help you visualize this process.
In the past few weeks, since this blog started, a great deal of attention has been placed on Dollar Index watching. With the FOMC (Federal Open Market Committee) decision to purchase $300 billion of long-term Treasuries, and extend mortgage-debt purchases to $1.45 trillion, the dollar bear crowd is in full force. This was not a surprise. Those who were dollar bulls may be seeing a crime being committed, and there are very few dollar bulls in site. But using the classic tools of trend line channels and Fibonacci resistance levels, the signs were “written” in advance.
In fact, the great lesson learned from the market reaction is that it was not a surprise. The scenario of a Dollar Index breakdown was scripted once the upper trend line channel was in place. This channel started in December 2008 and had taken full form by February 9th when a low of 84.79 was formed. The index then proceeded to a new high of 88.25 on February 18th. It zig zagged back to test the channel line on February 23 at 85.63. We saw a retracement failure there and that was followed by a move up. Using the simple trend line tool, the trader was able to project areas where the next test of support would occur near 87.8. Any probing of that area was an alert to be careful for those following a dollar bull scenario. Drawing an inner upper trend line also enabled a projected alert that the Dollar Index was in trouble if the price met the 88 region. The index probed 88 and broke the inner trend line on March 6. Being a forex detective and using the trend line tool, we have had 6 days of a signature of the presence of the dollar bear. It is a very good lesson in the use of simple tools for assessing market moves.
In fact, the great lesson learned from the market reaction is that it was not a surprise. The scenario of a Dollar Index breakdown was scripted once the upper trend line channel was in place. This channel started in December 2008 and had taken full form by February 9th when a low of 84.79 was formed. The index then proceeded to a new high of 88.25 on February 18th. It zig zagged back to test the channel line on February 23 at 85.63. We saw a retracement failure there and that was followed by a move up. Using the simple trend line tool, the trader was able to project areas where the next test of support would occur near 87.8. Any probing of that area was an alert to be careful for those following a dollar bull scenario. Drawing an inner upper trend line also enabled a projected alert that the Dollar Index was in trouble if the price met the 88 region. The index probed 88 and broke the inner trend line on March 6. Being a forex detective and using the trend line tool, we have had 6 days of a signature of the presence of the dollar bear. It is a very good lesson in the use of simple tools for assessing market moves.
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