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US Dollar Index Continues to Frustrate Longs and Is Rolling Over Again

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The US dollar is testing 82, and it looks like it's headed for a 200-day moving average break.

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The US Dollar Index has been very frustrating lately, as it seems that every time a trend is about to emerge, it reverses and heads the other direction. As I mentioned last week, these constant whipsaws are very frustrating for a trend-following trader, although many times this type of action precedes a strong trend.

However, we must always manage risk, and right now, the US Dollar Index just can't get going. It looks like we might be headed for a break or a test of the 200-day moving average again, so I have pared back long exposure until the DX can prove the uptrend is for real by breaking higher. See the chart below.


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The euro has been the main culprit in US dollar weakness, as it has recaptured the 200-day moving average, and now looks poised to offset the much larger bearish head-and-shoulders pattern that has been forming for over a year. It seems like the path of maximum frustration for market participants is still higher for the euro, and this trend could really gain some upside steam if it is able to take out the June highs around 1.34. As hard as it is to do, buying euros will probably work out in the short term, although we will need to continue to monitor the 1.30 level as a significant breakdown possibility.


Click to enlarge

The commodity currencies are the last ones that look weak relative to the US dollar. The Canadian dollar has rallied right into a significant resistance level, and I would be looking to add short exposure here with a relatively tight stop. It looks like the 0.97 level should at least stall the recent advance, and it looks like there is still plenty of downside back to the low 0.90s. I think you are risking less than 100 pips here for over 700 on the downside, so I'll take that risk reward setup any day. See the setup below.


Click to enlarge
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Positions in DX, M6B, M6E, MCD, MJY, MSF futures.
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