Managing Editor’s Note: Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.
He’ll talk about how, while everyone is paying attention to inflation, interest rates and the jobs report’s impact on the stock market…
They’re missing out on an even bigger trading opportunity – the currency market.
Here’s Larry with more…
Inflation, interest rates, the jobs report…
Investors pore over economic data and watch the Federal Reserve’s every move to figure out the impact on the stock market.
But if you’re only paying attention to stocks, then you’re missing an even bigger trading opportunity.
That’s the currency market.
Roughly $7.5 trillion in currency trades happen every single day. So in just 17 days, currency trades equal the value of the global stock market’s trades across an entire year.
And currency moves can lead to fast profits – if you know how to trade them.
I’ve been trading currencies since the 1980s. And over my 40-year career, I’ve traded nearly a trillion dollars’ worth of currencies.
So I know when conditions are shaping up for a profitable move. And right now, one is lurking around the U.S. dollar…
The King of Currencies
The U.S. dollar factors into nearly 90% of all foreign exchange transactions, making it the world’s dominant currency. (Foreign exchange, or “forex,” is just another way to refer to currency trading.)
That’s why I trade the dollar against other currencies like the euro, the Japanese yen, or the British pound.
It’s also why I pay close attention to the U.S. Dollar Index (DXY). The index tracks the dollar’s performance against a basket of other currencies.
And DXY’s chart can tip off the next big move.
As you can see, the dollar has been trading in a wide range going back to the start of 2023.
I wrote this about the dollar’s chart back in April:
DXY peaked in September 2022 at its highest level in over 20 years (shown with the arrow). Yet the dollar pulled back toward the 100 level into February 2023, starting a downtrend.
And since then, the dollar has been trading in a wide sideways range.
The 100 area remains support (the lower green-shaded area) while resistance rests around the 105 to 107 level (upper reddish-shaded area).
Since then, DXY has stayed in that range, as you can see in the chart above.
But I don’t expect that will be the case for long.
DXY is hinting a big move is on the way…
Free Trading Resources
Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.
Coiling for a Major Breakout
Let’s zoom in on the more recent time frame for DXY.
Notice the dashed trend lines on the chart below. It shows a triangle consolidation pattern.
The sideways trading range keeps getting narrower. We call this “coiling.”
And it means the battle between the bulls and bears is getting more intense.
Each side is stepping in more quickly to push the dollar back in the other direction.
Eventually, one side is going to win out, and it will deliver a big move in the dollar.
While this tension is building, it’s not yet clear whether DXY will surge or slump. So we need to wait for it to break through one of the trend lines.
Then the Relative Strength Index (RSI) needs to confirm the move. You can see its action in the green line of the bottom panel.
If the dollar breaks below the lower trend line, we’ll watch to see if the RSI pushes below 40. That would confirm strong price momentum to the downside.
On the flip side, if the dollar moves above the upper trend line, we want to see the RSI rise above 60.
Whichever way the dollar decides to break, I expect a strong move to follow.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict