Last week I spotted a positive momentum / price divergence that told me to play the long side because the market was about to make a meaningful bottom. At this point though I'm not looking for new highs just yet. I think the purpose of this bounce is to repair some of the technical damage produced by the leg down off the top. That leg left a very bearish looking island top, which was filled on Friday, so the first objective of the bounce has been met.
Right now I'm looking for an entry to play the short side early next week, and will be looking for a good retracement entry to go the long later in the week. Mondays typically have a strong open and are good opportunities to fade.
Dollar Index
The dollar's been having a rough go catching a bid lately, though I think we're working on putting in a long-term bottom. The carry trade is back, and lately that means we're either weak against the Euro or weak against the Yen. But with the Euro's overweighted representation in the index's currency basket, it's really the only currency that matters.
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| Components of the Dollar Index |
The Euro's been wedging and had looked extremely vulnerable to me, but to my frustration it broke out above it. With the market this overheated, this looks like an overthrow that will be followed by an imminent breakdown. The sideways action from the market fighting with the wedge's upper trendline has dropped momentum, and I see an obvious setup for a negative divergence in the daily RSI on a new high. This will make a great entry to the short side that I will play by going long the Dollar Index. Assuming we've seen the wave IV low on the EUR/USD, a measured move of V = I gives us a price target of 1.456 about mid week.
