The U.S. dollar had been under pressure since prices peaked at 89.098 in June 2010. However, that price slide came to an abrupt halt shortly after the U.S. Federal Reserve announced another US$600 billion stimulus package at 1:15 p.m. CT on Nov. 3.
Listening to the news, one would have thought this highly anticipated announcement would cause the greenback to devalue. However, this was not the case. Prices did immediately plunge to a new contract low in reaction to the report, but within a few minutes were found to be bouncing off a major line of support.
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This proved to be a classic case of “Buy the rumour; sell the fact!” This occurs when a market initially reacts to the news and abruptly changes direction.
This set the stage for the development of a “two-week reversal.” This formation indicates a market is about to change direction. The trend is turning up now that prices are trading above the downtrending channel.
In the short term, prices are vulnerable to a downward correction to alleviate the overbought conditions, but this weakness is not expected to last. It’s just a matter of time before the U.S. dollar strengthens further.
Two-week reversal
A two-week reversal indicates a change in trend. On the first day, the market declines and closes lower for the week. This is especially significant when prices are at a new low for the move. The following week, prices open unchanged to slightly lower, but fail to make additional downside progress. The decline stalls and prices begin to turn back up as buying increases early in the week. By the end of the week, the market rallies above the preceding week’s high and closes above that level.
Market psychology: The two-week reversal signifies a turn in sentiment. In the first week the shorts are comfortable and confident. The market’s performance provides encouragement and reinforces the expectation of greater profits.
The second week’s activity is psychologically damaging. It is a complete turnaround from the preceding week and shakes the confidence of those who are short the market. Shorts respond to strengthening prices by buying in order to exit the market. Some shorts buy to take profit and others buy to limit losses.
The accompanying chart illustrates how the price of the U.S. dollar has risen above the upper boundary of the downtrending channel.
Channels are useful in determining trends and for identifying a change in direction. In a downtrend the channel’s upper boundary is the downtrend line (line of resistance), and it is drawn first. The lower boundary is the return line. It is drawn parallel across the lows of each progressively lower decline. This line is where prices are likely to bounce off of in a declining market.
Market psychology: Resistance areas materialize as a market attracts selling up at the line of resistance. A line of resistance is determined by drawing a line across the highs. For a trendline to be both valid and reliable there should be at least three points of price contact – illustrated as A, B and C in the accompanying chart. Each point coincides with the high of a market reaction.
Once prices push above the line of resistance, all recent sellers end up holding losing positions, so buying increases as shorts buy back their positions and longs who bought at lower levels add to their profitable positions.
The rally in the U.S. dollar pressured commodity prices from January 2010 until June, and the subsequent decline of the U.S. dollar from June until November helped to support commodity prices. Keeping a watchful eye on the U.S. dollar index is another useful tool farmers can use for determining price direction.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit us online for more grain marketing ideas and educational tools, or call us toll free at 888-274-3138 for a free consultation.
