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US Dollar SSI Flashes Broad Based Bear Signal

DailyFX.com -

Talking Points:

-USD SSI Uniformly Flashes a Bear Signal

-Large shifts in SSI positioning towards USD strength in GBPUSD and NZDUSD

-Look for breaks in USD pairs towards USD weakness

The DailyFX Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore a follow through of the breakout is more likely.

For the past several weeks, the market conditions for the Breakout2 strategy were less than stellar. During the last report, we noted directional trends were beginning to perk up.

A new development has transpired this week in that for the first time in several months, SSI for the US Dollar pairs are lined up on the same side. We feel this is important because the price trend in the Greenback has been so strong towards strength. Now, according to SSI, the majority of retail traders have positioned towards USD strength. This obviously produces a USD bearish signal.

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Significant USD weakness simply isn’t being anticipated by the majority of retail traders so a bear move by the single currency will likely catch many of the traders off guard.

Digging deeper into some of the specific SSI readings, GBPUSD and NZDUSD expressed a large shift in sentiment over the course of this past week.

For example, the GBPUSD SSI shifted down 3.99 figures and the NZDUSD shifted down 0.95 figures. These are some of the larger weekly shifts witnessed since the beginning of 2015.

EURUSD 2 Hour Chart

US Dollar SSI Flashes Broad Based Bear Signal
US Dollar SSI Flashes Broad Based Bear Signal

(Created using FXCM’s Marketscope charts)

Upon inspection of the price charts of GBPUSD, NZDUSD, EURUSD, and AUDUSD, there does appear to be some unfinished business to the upside. Meaning, there are some higher probability patterns that would suggest additional USD weakness (the above named pairs moving higher) over the medium term.

Therefore, dips in the above pairs in the short term would allow the strategy to position for a breakouts higher.

For example, if you look at the EURUSD chart, prices have conformed to a price channel for the past week. A dip lower in the short term appears likely, but any continued break higher after the dip would be a valid breakout signal.

One of the strengths of implementing a breakout strategy is that if we are wrong in the analysis of the short term trends, breakout trades don’t execute until a breakout higher occurs. So a breakout lower would not trigger trades when we are filtered for breakouts higher.

With strong directional trends in place, expanding volatility and broad based sentiment signals pointing in the same direction, the ingredients exist for follow through in the break higher should one take place.

DailyFX Plus Breakout2 Conviction Chart for April 17, 2015

ADX

ROC

Volatility Expansion?

Sentiment Signal

Conviction

EURUSD

Trend

Bullish

Yes

Bullish

2

AUDUSD

Trend

Bullish

Yes

Bullish

2

GBPUSD

Trend

Bullish

Yes

Bullish

3

NZDUSD

Trend

Bullish

No

Bullish

2

USDCHF

Trend

Bearish

Yes

Bearish

2

USDCAD

Trend

Bearish

No

Bearish

2

USDJPY

Trend

Bearish

No

Bearish

1

EURJPY

Trend

Neutral

No

Bearish

1

GBPJPY

Trend

Neutral

No

Bearish

1

CHFJPY

Range

Bullish

No

Bearish

1

AUDJPY

Trend

Bullish

No

Bearish

1

EURAUD

Range

Bearish

No

Bullish

1

Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report. More specifically, the EURUSD, AUDUSD, GBPUSD, NZDUSD, USDCHF, and USDCAD were all upgraded 1 notch. The breakout conditions have improved to play a US Dollar break towards weakness. That means looking for a break higher in EURUSD, AUDUSD, GBPUSD and NZDUSD. It also suggests looking for a break lower in USDCHF and USDCAD.

Last Week’s Conviction Chart GBPUSD Briefly Dips to 5 Year Lows

To receive future articles emailed to you regarding the conviction ratings for the DailyFX Plus Breakout2 signals or trading an automated portfolio, sign up for the distribution list here.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

The DailyFX Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.

Follow me on Twitter at @JWagnerFXTrader.

See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

Feedback? Email Jeremy at jwagner@dailyfx.com


original source

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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