I’ll start this by going over the case for the DXY rally broadly and then dial into the reasons why this seems like the optimal level to look for it starting.
Working left to right.
The 2021 Breakout
A very sharp rally happened in 2021 in the USD. It was one of the most impressive things seen in the USD for decades. DXY had downtrended for a long time. Ranged for a long time. The rallies in this were weak (See extreme left for example) and then suddenly this hyper trending move came breaking some important levels and the general dull mood of DXY price action.
It put in that nice strong rally and then it had a bit of a head fake high – which could have been the completion of the first bullish impulse wave.
If that hypothesis is true, at some point the most might of USD rallies is coming. The question would be how deep is the correction.
That could end around where we are and it’s possible there could be a flash crash in the DXY to retrace the 2021 rally. In the event we’d have that sort of thing, I think when the pending harmonic signal was forming – we’d have seen a move lower to complete the M shape.
Harmonics are reversal patterns and for a while all I traded was harmonics (Was a great idea in a range, got me nailed against a trend). I’ve found when there’s a clear looking harmonic setup and you place a limit order for it, in the times it doesn’t fill fairly soon – it’s likely it will not fill at all. Price can go an extended period in the other direction.
So while DXY bulls would have to be aware of the risk a valid correction could still flash crash from these levels, this is a good spot to be looking to see it there are clear signs of trend formation.
The first obvious sign of that would be the 76 retracement, which is where we are close to now.
Looking more at the entry now.
DXY is an index of currency pairs traded against the USD. This index is very heavily weighted towards the EURUSD. DXY is essentially EURUSD inverted- at least most of the time. DXY has been crashing lately mainly due to the parabolic rallies in EURUSD – but this is now at the 76 retracement level.
Looking closer at this we can see the 76 rejection and now we’re at the 61 fib. If this breaks, this can be an early sign of uptrend failure. If the 61 isnt support we usually trade the 50 fib and if that’s not support a lot of the time we’re seeing the turning of the trend.
When it comes to betting on the DXY the more practical thing to do is to trade EURUSD. If you have access to Forex markets you’ll get better costs and liquidity trading EURUSD short as a proxy for DXY long.
If EURUSD makes the breaks of the next couple levels then it’s likely to capitulate to the low of the last leg.
That would express itself in a big recovery for DXY. It could even be the start of that big new trend leg.
This would give early targets on DXY around 122 and probably thinking it’s getting a bit overdone around 126.
Which would be a hell of a USD rally.
Here’s a good way to think about it. IF the thesis 2021 was a bullish wave 1 is correct, then it has to be true that the following wave 3 will be more impressive than wave 1. Has to be true. Otherwise that was not a valid wave 1 and wave 3. So I’m not saying we can know the wave 3 has to come, but we can know if it came it’d predict strong uptrend to 122 in DXY.
Massive EURUSD crash about to start.