Meaning of Price Action

The dollar has been thumped here today. There does not appear to be a key event. The drop in the dollar appears to be more a type of capitulation. Many, like ourselves have expected a pullback in foreign currencies, but the pullbacks have been shallow, as have been the dips in the equity market. The price action alone forced various market participants to sell dollars or risk missing the move.

A couple observations about the dollar's decline. First, many players do not have this position on and have been forced to chase the market. This means that in the short-term at least, the late dollar shorts are in weak hands and a setback could force some of the shorter term players out. Second, sterling, as we often find, led the euro, insofar as it is trading at new highs for the year earlier this week and the euro is playing catch-up. Third, the yen is fully participating in the move as the head and shoulders pattern we identified last week remains the intact. The neckline near JPY96.60 held yesterday, suggesting immediate potential back toward JPY94.55, Monday's low.

In a break out environment, it is common for the market to look at the next round levels, like $1.40 in the euro and $1.60 in sterling. Do not be fooled by them. They do not necessarily signal a top. Disciplined traders are better served by waiting for a sign that the foreign currency buying is getting exhausted. Meeting technical price objectives or round psychological levels is not the same thing.

Lastly, the buying of foreign currencies, coinciding with rallying stocks is partly a reflection of expectations that current trends will remain intact. However, given how well the debt market is holding up (10 and 30 year bond yields are up a single basis point) suggests the dollar's decline is being taken in stride and is not the same as a flight from US assets.
Meaning of Price Action Meaning of Price Action Reviewed by Marc Chandler on May 20, 2009 Rating: 5
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