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Dollar Euro update

Using the dollar as an example, this discussion details how auctions trade in ranges, and how they react to historical levels.

It also continues the tradition of predicting future price action.

Preface

I hope even non-traders could study these charts, with interest.  I’ve tried to make my discussion clear and concise, so as not to bore non-charting-enthusiasts.

I think the way prices act in auctions can be fascinating, even to someone not taking a position. They tell us things about human psychology, and how people value things.

The fact that we are looking at 20 years of relationships between the dollar and the euro means that, charts on this scale are talking about massive tectonic macro-economic movements.

On this time frame, we are talking about events which play out over years, and affect people in many ways.

So these things matter on an investment time frame, and a scale of decisions about what we do in our lives, that can play out for many years, and impact everything that comes after.

Prediction update

The dollar is following our predicted path like a champ.

I left the old prediction marks from the June 30th post with the red line drawn on.

I have made a lot of posts on this topic.  Here was the most recent on.

This also brings the Euro into our target short zone.

Although, clearly, the dollar hasn’t reached the predicted turning point yet.

The most surprising thing here (surprises are always the most interesting thing), to me, is that the Euro has climbed as far as it has, while I still have the prediction of the dollar falling further.

One thing I didn’t draw on the dollar chart was the tail from 2016.  I did draw a bounce there, at almost exactly 92, but ultimately I predicted it would fall further, but not a lot further.  I’ll add that level with a purple line now.

Note the level just above that, at about 92.5, which I’d originally marked as “2005 top”, was a secure low in 2015.  (A “secure low” is a place where price bounced violently in the past.)  When that level was retested in 2016, it was slightly exceeded, then caused a massive bounce.

Both times, price moved all the way back through the range, after that type of bottom….huge moves in the dollar.

Historical ranges

The reason I labeled that level 2005 top was to emphasize how price acts towards historical levels, even levels 10 years old, like this one.  If we zoom out, we see that the tip of the 2015 tail rejected from a 2005 top.  They are like a mirror image of each other (the bottom tail, and the former topping tail), and this is common on all time frames.

As we can see, when price first comes down, and touches a historical top, it’s very common to react swiftly, and bounce violently.  This happened in 2015.

(In volume profile, or market profile, this is a “low volume node.”  A place where very little volume traded.  If you made a graph of music, this would be like a silent place.)

In 2016, we got the second touch of that 2003-2006 upper range, and it dug slightly deeper, to find the next top, which was from 2004

Now we are tapping this area for the 3rd time, so the expectation is to dig deeper.  But, we still have a decade of tops in this area.

The next set of tops down are the ones I labeled 2006 shoulders, which will probably provide some support.  But they are not as strong a reference as a former top (an inverse tail.)  That’s why I labeled the 2009 top as a strong support reference.

Value areas

Another way of framing this is as the 80% rule.  Which states: when returning to former ranges, price is likely to reject (at first).  But if it pushes in to the former range, and holds inside the value area, then it’s likely to retrace that entire range.

This is what we have seen since 2015, the creation of a range, going on 3 years now, price zigging and zagging back through that area, establishing value.

The “value area” of a range is the middle 70%.  Price can move in to a range up to 15%, without getting in to the value area.

So, knowing all that, we can redraw this historical chart in terms of ranges and their value areas.

Some charting programs could make a nice neat market profile of these ranges, and give us the value areas, but we can do it on the trusty calculator of a phone or in our brain.

Isn’t that funny, how the 03-15 value area high also happens to be exactly at the 2009 peak, where I predicted a turning point.

This is not by accident.  All of this thinking becomes routine, and often unstated.  You can visually see how ranges and value areas work, without drawing it out in detail like this.

But if you are taking a significant position, it can help to have a plan like this drawn out as a reference.

I remember someone remarking that the dollar might fall to 80.  80 is almost the midpoint of the range from 03-15.  It would be called the “point of control.”  If we charted the volume traded for the 12 year range, the highest amount would probably be at about 80.

But as we know, from the range discussion, if the dollar gets in to the value area of this lower range, it’s likely to fall all the way to the other side.  It might bounce at 80, but that probably wouldn’t be the bottom.

So that 03-15 value area high line, where I’m predicting a bounce, is an important level.

Range extension

The converse of the 80% rule is how prices move in a discovery process, when it moves OUT of a range.

If price moves out of a range (and the 03-15 range is a HUGE one….meaning price is extremely compressed, and likely to push extremely far when it moves out of that range), if it holds more than 10% out of that former range, it’s likely to double the range.

Easy peasy, duplicating our ranges.

Funny, again, isn’t it?  This takes us right back to the 2000 highs, giving us a nice neat 20 year range.

So if the 03-15 range top holds, as I predict, the up move could go a LONG way!  From about 90 to 114-116.  These are just numbers, but that is a face ripping move for anyone with a position.

This would probably equate to the Euro falling to parity and below.  It would probably play out over a few years.

Fundamentals

What fundamentals would support this kind of move?

Uh, the Fed unloading $2 trillion of bonds?

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