Let’s take a look at the Daily Breakdown into a Weekly Support level that must hold now, or else risk a further collapse from a broader chart pattern.
We’ll start with the smaller picture breakdown on the Daily Chart:
As we saw from yesterday’s “Instant Intermarket Update after the Federal Reserve Announcement,” traders reacted bearishly – as would be expected – with the announcement that QE3 will continue without adjustment (“no taper” outcome).
Similarly as would be expected, gold, oil, and US Stocks surged on the news.
For the US Dollar Index, we see the critical confluence support level into the 81 region which failed as support – triggering a short-sale signal – after the announcement.
The Index collapsed into “Open Air” which is the term we use when there are no obvious chart-based support levels (such as trendlines, moving averages, or prior price levels) on a given timeframe.
Notice also that the US Dollar Index triggered a minor “Bull Trap” on the initial breakthrough above 82 after positive divergences.
Take a look at prior educational examples of Bull Traps (and the trading/strategy implications when they trigger):
The Daily Chart implication – a pathway through open air – suggests a possible movement lower toward the 79 prior support level from late 2012 and early 2013.
Before we jump rapidly onto the bearish side of the US Dollar, monitor the Weekly Chart for one key support level and broader structural price pattern in motion:
While the Daily Chart does suggest additional downside action is likely, the Weekly Chart actually has us cautious and intently focused on the 80 index level which represents the rising “Arc Trendline” as part of a broader pattern in motion.
Note how the US Dollar Index has traded consistently within the boundaries of the adaptive “Arc Trendline” pattern.
If the pattern holds, then the movement down to the 80 level is entirely consistent with the pattern in motion and we would be on guard for a bounce or rally-up off the 80 level to continue the pattern.
Of course, we monitor patterns not to predict the future, but to establish baseline expectations (what is logical or ’should’ happen and what would be unexpected) which allow us to create trading or position (swing or longer) parameters.
A bearish breakdown cleanly under 80 would set in motion another breakdown event toward 79 or even lower.
However, despite the Daily Chart initial and logical breakdown, keep your focus on the Weekly Arc Trendline and potential for a bounce… or secondary potential tradable breakdown opportunity.
This article is brought to you courtesy of Corey Rosenbloom from Afraid to Trade.