The Dollar Index Is Down 4%: What Next For The Forex Market?

In my last article on July 9, I covered how the Dollar Index had moved up by 5%, breaking through significant levels and a seven-year period of consolidation. 

Trend followers were particularly interested in this move out of consolidation. (Trend followers describe a style closer to investing and a proven track record that goes back decades as opposed to day trading, which has a history of disappointment and losses.)

What piqued the trend followers? As the saying goes, the longer the consolidation, the bigger the breakout. If this breakout holds, the price of the Dollar Index and the major currency pairs have the potential for big moves over the coming months, offering the opportunity to compound for exponential returns. 

But, since the high of last month, the Dollar Index has declined by 4%. What could this mean? Well, there are two scenarios. 

Scenario 1

The move out of consolidation in June is a fake breakout, and the price reverses back into consolidation. This is common in any asset that has been in a sideways market for a prolonged period. I have a rule in my investment/trading plan that states that if an asset has been trading for X months, I don't enter in on the first breakout. I wait for further confirmation before taking a position that avoids losses through fake breakouts. 

Scenario 2

This current weakness is simply a pullback to retest resistance-turned-support, a natural feature of price action, before continuing the bull trend. This is where good investors apply patience and allow the right high-probability environment to present itself before taking a position. 

Below is the monthly timeframe. 

As an investor, my preferred stance is, of course, scenario two, which will allow me to enter into the best-performing currency pairs on my list. 

I will monitor the situation daily and let the price dictate what action to take. 

Patience for now!