Top Dollar or Dollar Top

U.S. dollar strength has been prevalent throughout this year. Its effect has resulted in strong headwinds for the precious metals complex. Dollar strength has been the most significant force involved with limiting any real upside movement.

On February 16, the dollar index traded to the lowest price point this year when it reached 88.15. From February up until this week, the dollar has gained almost 5%.

For the last three consecutive weeks, the dollar has closed dramatically above its opening price on Monday, up until this week.

On a weekly candlestick chart, this week’s candle is called a “doji.” A doji is a candlestick in which the open and closing price are identical or a few ticks apart. This candlestick is significant in that it clearly reflects indecision in the market. It indicates a point in time in which neither the Bulls or the Bears are able to dominate market action.

Although the doji candle represents indecision, it does not indicate a key reversal unless found within a more complex pattern. Such is the case when viewing this week’s activity through the eyes of a daily candlestick chart. The pattern created this week is called a “Bearish Harami Cross.”

The “Bearish Harami Cross” is composed of two candlesticks that occur after a defined uptrend. The first candlestick is created when there is a broad range between the lower open and higher closing price. The following candle is a doji candle that is completely engulfed by the body of the prior candle. This pattern requires a confirming candle in the subsequent cycle. This final candle must close below its opening price and trade to a lower low and lower high than the previous candle.

On Tuesday of this week, the dollar index closed substantially higher, creating a large green candle. This was followed by Wednesday’s activity in which trading activity formed a higher high and a higher low, with an equal open and closing price creating a doji candle. This was followed by a large down day yesterday and lower pricing today.

The candlestick pattern identified on our daily charts clearly indicates a high probability that the current rally in the dollar index might have run its course, and that pricing will move lower in the weeks ahead.

Wishing you as always, good trading,