Chart Of The Day: USD Drops On Inflation Data As Bulls Cash Out; Is The Move Over?

Wednesday's Labor Department release of the US's CPI data showed inflation climbed in December, on both a YoY and MoM basis.

The consumer price index rose 7% last month, compared to the same time last year. The uptick was the fastest increase for this metric since 1982.

Still, despite exceptionally high inflation, dollar bulls cashed out. That's because the rise was in line with expectations.

The move completed a bearish pattern on the Dollar Index's technical chart, suggesting the USD's decline isn't over just yet.

Dollar Daily

The greenback completed a Descending Triangle, a pattern in which supply drowns out demand, pressuring prices as sellers seek more willing buyers at lower price points.

The descending triangle was the market mechanism that allowed bears to push the dollar below its uptrend line since May, adding to the bearish aspect of the move. The same thing occurred with momentum on the global reserve currency, as the RSI fell below its rising trendline.

However, it's important to clarify that notwithstanding yesterday's activity the trend remains higher, as determined by the currency's peaks and troughs.

Trading Strategies

Conservative traders should wait for a new peak above 97 to trade along with the rising trend.

Moderate traders would short if the price successfully retests the descending triangle, which is likely to be around where it meets the rising trendline. That area is marked with an X on the above chart.

Aggressive traders could enter a contrarian long position, given an attractive risk-reward ratio, counting on the dual support of the horizontal line where it meets the uptrend line—at mid 94 levels—and the 100 DMA, before joining the rest of the market in a short as the DXY struggles against the descending triangle. A trading plan that meets the trader's personal needs is crucial. Here is a general plan as an example:

Trade Sample – Long Position

• Entry: 94.60
• Stop-Loss: 94.50
• Risk: 10 pips
• Target: 95.60
• Reward: 100 pips
• Risk-Reward Ratio: 1:10

Author's Note: Technical analysis is not fortune-telling. Rather it weighs the evidence, according to an analyst's interpretation, in order to make a judgment call based on historical data, using the principles of technical analysis. And statistics, by definition, won't necessarily provide the same outcome each individual time. A trader's job, therefore, is to manage his or her luck by getting in on the side of statistics in overall trading. Trade according to a plan that addresses your timing, budget, and temperament. Use our samples to help develop that skill, but not necessarily for profit. Consider this post a tool for trading education, with the hope of becoming skilled enough to garner profits. Expecting immediate profits guarantees disappointment. And there's no money back.