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How to trade currencies based on DXY analysis?

USDJPY has again moved higher since yesterday. The latest move that has taken the pair higher by almost 1%, started from a seemingly minor support level defined by 60 min. Bollinger Bands and a 50 period moving average in the same timeframe. One dilemma traders are often faced with is whether a minor support (or resistance) level can be trusted if there is nothing in higher timeframes to support the idea. The level from which this USDJPY move started from was kind of “in the air”. Apart from this indicator based support, there was no previous daily high or other important support level to give extra confidence to traders looking to go long USDJPY.

Still the pair made another tradable move and some traders were left in the dark on whether the move happened for a reason or whether it was just random fluctuation in the price. However, those reading my analysis yesterday knew what to expect and were prepared to take advantage of this likely move. Am I just boasting to draw more attention to my analysis, or is there real substance behind this claim? The beauty of the blog style analysis is the ease of access to the previous articles. My readers can always refer back to my previous articles to verify the validity of my analysis. It’s all there, openly and honestly. Let’s have a quick review of what I said in my analysis yesterday.

DXY 240 min

Here are some extracts from yesterday’s DXY analysis: “If the current support in 1h chart does not hold then I would look for long USD trades (i.e. short EUR, AUD or JPY for instance) at the area of 4h gap and previous weekly high.” In addition, I said: “… the price action in DXY future helps in understanding what is likely to happen for instance in USDJPY. In order to increase the probabilities of winning, it is advisable to trade the USD against weak currencies such as AUD, JPY and EUR…”. As can be seen from the chart above (red circle) DXY retraced to the support area and this correction was short lived, just as I suggested elsewhere in my article. This was a great opportunity for those selling the Japanese Yen against the USD.

USDJPY 60 min

Here’s what took place in the USDJPY at the same time. The black and white candles are the US Dollar Index future (DXY) and the lower green and red candles are the USDJPY rate. This chart clearly shows how DXY falls in the support area I suggested would attract dollar buyers, and as soon as we have an up candle in the DXY the USDJPY starts to rise as well.

USDJPY W

USDJPY, Weekly: USD is still moving higher against the JPY as Bank of Japan seeks to create inflation by increasing their QE commitment. The pair is now approaching a weekly pivot high (114.65) from December 2007. The next similar pivot high from October 2007 is at 117.93. Weekly support at 113.13 (last week’s low).

USDJPY 240 min

USDJPY 240 min: Should the weekly pivot high at 114.66 cause a pullback against the trend the support levels to keep in mind (and drawn in your charts) are as follows: 1) the high from day before yesterday (114.20), 2) the four hour pivot area (113.13 – 113.51) which is also the weekly low from the last week and 3) A Fibonacci cluster of 23.6% retracements (112.45 – 112.74). I consider the Fibonacci cluster and the area of 4h pivot (as it happens to coincide with last week’s low) as higher quality support levels than the nearest one at 114.20.


Conclusion: The trend is still strong and can be expected to continue as the BoJ has only just increased its QE program and the Federal Reserve is not looking to start a new one. The way to benefit from an uptrend is not to buy when price hits new highs, but rather wait for a pullback and time the buys at levels where this contra-trend move is likely to be overdone and meet with new demand. Momentum change in lower time frames (1h and 15 min and sometimes even 5 min charts) can confirm the validity of the support levels that I have pointed out. If the historical resistance level at the weekly high from 2007 causes a move lower, I think it will be met with new buying at the of the above mentioned levels. Therefore, use alerts and monitor the momentum changes at these levels.

Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.

Janne Muta
Chief Market Analyst
HotForex

Wednesday, 05 Nov, 2014 / 11:11

Source : https://blog.hotforex.com/how-to-trade-currencies-based-on-dxy-analysis/

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