Conventional wisdom is that the USD will continue to strengthen as the first Fed rate hike approaches. However:
- Markets rarely go anywhere in a straight line
- The US Dollar index is up 4% over the last 5 weeks, and more than 20% since February 2014
- Some of the most profitable technical trades go against the fundamentals.
With these points in mind, have a look at this possible reversal signal:
This set up fulfils the “M” reversal criteria – the first peak is outside the Bollinger bands, the second peak within. The question is whether the current candle is the peak. To confirm the pattern, the next candle must have a lower high and low than the current candle. The sell signal comes on a close below the low of the current candle, at 1.3675.
Assuming an entry around 1.3670, a stop loss order may be placed above the high of the current candle at 1.3720. The target is not clear cut, as this is NOT a Bollinger band trade, but a trend change trade. Traders may therefore look at a trailing stop loss/ take profit of around 50 points, and let the market decide how far the market will drop.