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DX As An Economic Indicator

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Possible stop run scenario building up in Dollar Index which could have a big knock on effect on all USD pairs.

 

The Dollar Index continues on is way down to the bottom of 1 year range. But Capital Markets report the DX has net long retail (note retail) traders since March.

 

Fundamentally most traders expect the Fed to raise rates, that will cause a steep rise in USD. How are big traders going to get their long orders filled if retail traders are holding so many long contracts. Shake them out, their stop positions are obvious, they put their stops in the most obvious place because that is the only place that could possibly get defended. So push price lower for a small loss to stop out the unwary and pick up all those newly available long contracts and the big trader is ready for the expected rate hike. Such a senario was also played out 24th Aug 2015. 

 



 

 

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Great post Caseynotes  - and you don't need a Fib level or nth wave to tell you.  Simple - that's how the market works - liquidity is king. 

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Interesting article  and much of value for discussion, great post, but I don't think this is a panacea for trading. Certainly not much there for the short term day trader right?  All of this stuff is targeted at assessing the long term trends.  While not a fan of fundamentals trading (or investing for that matter) I do look at the GDP and unemployment and key bond markets such as the US 10year yield curve but only in so far as they impact sentiment.  I believe that it is sentiment that moves markets and while following the "big boys" in a trend is sensible following them over the cliff at the bend in the end is not.

 

Recently you put me on to looking at DX and it is interesting to do so but again not conclusive because of the many variables in the basket (too many to trade the DX for me).

 

I do use COT data, collect it every week and analyse it over the long term (past 10 years at least).  When in a long term trend following the non commercials is a decent bet, but you don't need COT to tell you there is a long term trend, this is simply providing comfort that you are "safe" in the herd.  That's fine until the the wheels come off the wagon and then the non commercials overshoot badly.  This is where I turn contrarian and seek super massive skews in COT, together with other indicators, to try and spot the bend in the end early.  Most recently this worked well for Gold for instance.  The trick with COT is to decide whether to follow the non commercials or bet against them.  In commodities for example it is the commercials that are the "smart" money.  The spivs don't actually know what is going on because they are not inside the market like the commercials are.  Think miners and Oil companies.  The non commercials have to be invested in the market and are chiefly trend followers.

 

Overall my view is that a balance of methods yields best results, in terms of assessing the long term trends and likely trend changes but can this stuff help with making an actual entry and placing a protective stop?  I don't think so.

 

Also in the article they refer to fundamentals but the only thing there that I would call a fundamental is the GDP and unemployment data.  DX, Bonds and COT are all responsive to the market not the other way around!  So we come back to technicals vs fundamentals and I think technicals are better because they attempt to map sentiment, which is the key super driver of all markets.  That said I do agree that having a good understanding of key fundamentals as they pertain to impact on sentiment is a good plan.

 

I'm sure this debate on technicals and fundamentals will run and run and so it should.

 

 

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Interesting take again  I like the thinking regarding what may happen on the USD but not sure I can subscribe to the reasons.  For the big players to consciously force out retail players they would have to be colluding and these guys view each other as competition and don't give a rats proverbial about retail, or their own clients for that matter.  No I think the market is just doing what it does, trying to find the right level to go in the direction it really wants to and, as said before, it's all about sentiment.  Interest rate rise on USD?  Maybe but there will be a flood into USD if other markets start to take a hit.  Now that really is fundamental no?

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Yes, I agree fully about different types and amounts of information, you need and can use to help make decisions. Getting the right kind and not too much makes a big difference to making basic direction bias decisions, which every trader must have in the back of their mind when they are thinking of placing a trade. And yes, the fundamentals won't really give entry and exit points, more a guide to likely direction and potential turning levels. Also, yes, different information is needed for different trading styles and time frames. I want'ted to make the case that the information is out there and to sort through and use what is relevant.

 

As you say the big boys are fallible, and they are not totally confident in there own decision making either. They know, as we all should that this is a numbers game (probability) nothing is certain, and only time will tell if our 'edge' or system has merit.

 

Your point about the commodities is good and I was minded of the article I posted about the recent Chinese "frenzy" buying, not even knowing what they where buying, priceless.

 

Thanks, that was a good and useful reply.

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Re; stop runs, they definitely do happen, exactly who they are trying to shake out does't really matter. It is a question of liquidity, if you need to get your orders filled and the contracts just aren't there, and you are big enough to do something about it you do.

 

You see it all the time and on different time scales. You see a level being respected, then a move that smashes through all the limit orders placed there, breakout job done? no, you then snap all those contracts and reverse the price again with you on board instead of on the sidelines. Ya.

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 agree stop runs happen, just think they are a natural occurrence, maybe that is too naive, dunno.  In the end I suppose it doesn't matter much so long as we recognise it and act accordingly.  One thing I look for in similar fashion is position covering.  When a large part of the market (ideally the non commercials) have to cover position going the wrong way, this tends to trigger a massive move through a line of resistance due to the position covering.  When this merges with my bigger picture analysis and I am on the right side of it an awesome trade emerges  (often happens on tramline or Triangle breaks as well as pure resistance lines).

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That's right, and that's the main reason I am very wary of late Friday afternoons and especially end of month Friday afternoons because you often see position covering then as a matter of routine. That's the time the boss comes around and declares 'right guys, time to close your losing positions'. Try again next week (if we let you back in the door).

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Very interesting little 2 minute video interview of an ex JPM trader turned prop trader and how the massive trades at JPM allowed him to influence the market, direct it, or hold up it up. 

 

 

 

 

 

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Dollar Index hits the bottom of the range and is squeezed by a descending triangle formation, interesting times.

Points to remember, fundamentals, Fed rate hike sometime soon? more likely than a rate rate cut?

 

Also remember all horizontal and oblique support and resistance lines are subjective, they are also zones rather than lines.

Also, there can be overspill as new shorts are swallowed up by the inevitable limit orders placed in the zone, even computers take some time to process data.

 

Going back to yesterdays discussion on a possible stop run (if institutions expect a rate hike), look at the run on the 24 of August, over 60 pip, that was no over spill.

 

Limit orders on the line had their stops taken out, long term longs with more breathing space had their stops taken out. New shorts getting in on the breakout found bids. So the bulls were taken out then bulls started buying, they were different bulls.

 

Await the 8am bar with interest.

Daily and Hourly chart.

 



 

 

 

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that would be the red wick(shadow) below the line - takes out the non-pro's then the big guys move in and buy up?  (thinking of your explain the other day) C

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That's right, the wick down between Aug and Sept on the daily chart, Something forced that move through all those stops, job done for a real bear. As a bull, if your big stop had just been taken out would you immediately re-enter? unlikely. Something had a plan. See the video link a few posts down where the ex JP Morgan trader states quiet clearly that as an institutional trader he had the power to move markets, or hold them up if needs be (trading 400 - 500 lots *^*$$**).

Remember though, the DX is best used as an indicator rather that to actually trade (in fact I am sure I've read that it is usually only large players who actually use it), so it's a guide to what could or should be happening to the other USD pairs. Remember also that no indicator can actually give entry or exit signals, only the price action on your chart can do that. That is what is happening now, indicators (and levels for that matter) are based on the past and as I'm sure you've heard before 'past performance is not a ? (something about the future)'.

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yes i listened to that JP guy talking about his experiences, very interesting, it took some adjusting he didnt have that clout any more in his new role.  I won't trade DX I'm sticking to EURUSD and on sidelines at moment.  Thanks, C

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I agree that the USD is at a pivotal moment, will it rebound or drop through?  Price is just poking through the supporting Triangle line on the daily chart.  As  points out this is not a hard line but a zone and it can poke through a fair way and then rebound back within the line over the day.  Things are very interesting in GBPUSD too. 

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Balance of Probability Bounce up?  (rationale - pro's getting ready for rate hike)  That's my thought but I won't eneter now until trend becomes clear - then short EURUSD when I can find entry point - sound sensible? (if my scenario is correct) C

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Hi   Just a thought for you.  GBP looks better set than EUR just now and breaking lower as I write.

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Your overall rationale is sound, most must be expecting a rate hike rather than a rate cut, and therefore dollar up and euro down. But  and myself have be talking about this for weeks now and it still hasn't happened. mostly due to a string of poor data out of the US.

The DX opening hourly bar was a nice bullish Pinocchio bar though certainly no major stop run bar.

EUR/USD still hasn't made up it's mind but seems to have rejected  daily resistance at 11410.

You are right to wait and watch. Another attack on 11410 or re-test 11320 daily support via some minor support levels on the way?

 

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Interesting - .  Wonder why he moved to Futex.  Seems like a step downwards (he claims he was successful at JPM)?

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Hi  Futex just recently (days) did this series of interviews with their traders but chopped them up into themed mini interviews and I haven't seen the whole thing. But I know from a Tom Dante webinar (it might be the one I linked to in the 'some auction market theory' thread) where he talks about having his trading history examined in fine detail when applying for a position with them, so I don't doubt it's all genuine.

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Dollar index continues in it's attempt to crawl back into the safety of it's long term range after breaking out to the down side on Friday. Daily and Weekly Chart.

 



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Dax and Eurostoxx traders, it's a holiday today for Germany, France, Belgium and Netherlands.

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Yeah Dax will be more of a follower than a leader today but Euro is widely traded.  The DX is unsurprisingly mirroring main USD crosses where they have all reached a level and are consolidating.  I'm still waiting for a pull back to offer a fresh entry point for further USD rally on all of these crosses.  USDCAD is the most interesting one just now with quite a strong rally put in and I'd expect that to continue once the retrace is concluded.  Bodes ill for Oil... 

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The DAX may not be open but someone must be actively trading futures because it just made a new lower low!

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Interesting take on the NFP data but who really knows?  We haven't yet seen the retrace on DX that I have been expecting and could easily get another leg up (down on EUR and GBP) before this happens but it is still a strong likelihood for me and after it does it should spring back into a strong rally.

 

My current strategy is to wait for this retrace with my previous positions around the 3 May turn stop protected at BE (against a complete reversal of trend) and seek to add in the direction of USD strength when the retrace is completed.

 

Now what's happening on stock indices...?

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