The US Dollar Index has formed a short term down trend since peaking in September 2022. However, it has shown signs of bullishness in the month of February culminating with the forming of an ABCD pattern last Wednesday. This ABCD pattern has a retracement less than 50%, which is bullish along with a positive momentum due to its 5 bars down, 1 bar up trigger. However, prices currently sit inside a formidable resistance area between 103.85-104.85 on the daily chart. This area contains a volume profile ledge, the 55 EMA, 100 EMA, and 200 EMA. There’s also the monthly R1 pivot at 104.522. So, it’s not surprising that this two-week rally has stalled here. However, if we drill down to a 240-minute chart, there’s potential for low risk/high reward trades. There’s an area of support between 103.40 and 102.86. This area contains a volume profile ledge of support, the 55 EMA, an upward sloping support line, and Fib symmetry. Some options for entry include an aggressive entry in the upper part of this zone between 103.40 and 103.13 or a more conservative entry in the lower end of this zone between 103.13 and 102.86. This ABCD pattern fails below 102.39, so that would be a good place for stops. You could also wait until prices traded inside this 0.54 wide support zone, drill down to a lower time frame, and look for signs of a short-term change in trend from bearish to neutral to bullish. Then enter long positions with tighter stops. This pattern has multiple upside targets with the first two being at 105.56 and 106.21. All trade set-ups should provide favorable reward to risk ratios. Let’s go through two examples. If we enter at the mid-point of the 103.40-102.86 support zone at 103.13 with stops at 102.38, then our total risk would be 750.00 per contract (103.13-102.38*1000). Choosing target 1 at 105.56, our potential reward would be 2430.00 (105.56-103.13*1000) producing a nice 3.24 reward to risk ratio. Choosing target 2 at 106.21, our potential reward would be 3080.00 (106.21-103.13*1000) producing an even better 4.11 reward to risk ratio. So, keep an eye on the Dollar Index early this week.
On the date of publication, Thomas Bills did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.