Chart Of The Day: Dollar Showing Signs Of Life On Yield Spike

Treasury yields are generally expected to fall as equity investors rotate capital out of stocks and into Treasurys. However, despite the fact that the US and global equity selloff extended into the trading new week, Treasury yields are at 2.996 percent and are trading at the top of the session.

Investors can see and almost taste the 3.00 percent milestone. This yield spike is attracting foreign investors, spurring the dollar into an upside (intraday) breakout of what may prove to be a bottom for the global reserve currency.

US Dollar Index Daily Chart

The Dollar Index has been trading in the shape of a symmetrical triangle since February, demonstrating that both bulls and bears are advancing toward each other, intent on overrunning the opposition. The line tracing the pattern’s lows marks the bulls’ stronghold, while the bears “draw the line” at the highs.

Stop-losses are placed on the other side of these extremes. Once one force consumes the buy or sell order shots of the other, the pattern advances beyond the “red lines” into its territory to feast on further profits. This is the dynamic that causes a breakout.

Should this upside breakout last into closing, it would increase the probability that bears would be forced to cover “losing their shorts.” Since covering a short means buying the asset to return it to the broker, this helps the bulls further their advance into supply, or bear territory. This further advance emboldens bulls to keep charging, which in turn attracts more traders to their bullish cause. Finally, bears are forced to admit the error of their ways and convert, joining forces to facilitate what becomes a bullish stampede.

The 50 dma (green) demonstrates where the pattern’s supply-demand balance was within the pattern. Since it was a “symmetrical” triangle, it was in the center. Spiking yields propelled the dollar, changing that balance. The 100 dma (blue) reveals the significance of the upper boundary of the symmetrical triangle.

The RSI provided three positive pergences:

  • When prices rose in late January/early February, amid declining price action, giving a heads-up that prices would follow momentum higher.
  • When it broke above its own downtrend line in February, even while the price had yet (even now) to cross above its downtrend line since November.
  • When, as opposed to the price’s symmetrical triangle, spelling doubt, the RSI formed an ascending channel, showing that the bulls are gaining on the bears.
  • Today’s price upside breakout was backed up with the RSI escaping its own pattern, demonstrating that momentum has the price’s back.

    Trading Strategies – Long Position Setup

    Conservative traders would wait for the upside breakout to include at least the March 2, 90.93 high. This would complete the minimum required two peaks and troughs to establish a new uptrend. Depending on risk aversion, they may also wait for a close above the 200 dma, currently at 92.05. Then, they would wait for a downward correction to retest the support of the pattern and integrity of the fledgling uptrend. Confirmation would include at least one long green candle to engulf at least one long red candle.

    Moderate traders would wait for at least a close above the 100 dma, currently at 90.74. Since the previous March 2 peak is only 19 points higher, they might wait for that price to be breached on a closing basis as well to avoid a bull-trap. They may wait for a return move for a better entry if not to confirm the integrity of the pattern and the new uptrend.

    Aggressive traders may enter upon a close above the pattern with a stop-loss below the triangle’s top, below 90.32 (today’s low price) per the current angle. Keep in mind that the downward slope of the top proportionately lowers the premised support.

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