Stocks & Commodities V. 29:1 (56-59): Forex Focus: The US Dollar And Precious Metals by Donald W. Pendergast Jr.

Stocks & Commodities V. 29:1 (56-59): Forex Focus: The US Dollar And Precious Metals by Donald W. Pendergast Jr.
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Forex Focus: The US Dollar And Precious Metals by Donald W. Pendergast Jr.

Playing the US dollar versus the precious metals market dynamic is one of the highest-probability trading games around. This is especially significant at major trend reversals. Will the significant support area near 76.00 even hold, much less act as a reversal point?

October 8, 2010

Youíve gotta love currencies, whether you trade them by way of the futures or forex markets. These markets really like to trend, and across all time frames to boot. The US Dollar Index (DX), one of the heavies in the currency world, is no exception, and it is well enmeshed in a substantial intermediate-term downtrend of its own. Letís take a look at this key marketís daily chart and see if we canít decipher some of its technical warning bells that are currently seeking to capture the attention of savvy, opportunistic traders (Figure 1).

Swing analysis is a time-honored technique among many traders, and nowhere is the task easier than in markets that make nice, clean price swings over sustained periods of time. In the case of DX, the AB swing covered 8.63 points, finally making a minor reversal in the area of a Keltner band (point B). Not surprisingly, swing BC terminated at the next higher Keltner band (yes, these things really do identify key areas of support and resistance; these Keltners are plotted 4.2 and 7.5 standard deviations away from a 45-period exponential moving average [Ema], respectively).

Once swing CD got rolling (with point D yet to be determined), sharp traders would have already been doing some basic math in order to calculate a possible termination area for CD, multiplying the length of swing AB (8.63 points) by 0.618 and then subtracting it from the value of point C (83.635). That calculation yielded a price value of 78.30, which also happened to coincide with Keltner band 3 (with ď1Ē being at the top and ď4Ē at the bottom). Keltner 3 was violated and the DX has continued to drop, which means that traders will now grab their calculators and run the same calculation again, only this time plugging in a Fibonacci ratio of 0.786 into the equation instead of 0.618. Guess what? This calculation comes up with a value of 76.85, which is just 79 (oh no, another Fibonacci number!) cents above Keltner band 4 at 76.05.

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