Almost time to buy the dollar again?

Although the dollar has been very strong over the last several months, it has taken a slide recently. A pullback is generally expected when an instrument has run up as much as the dollar has and the inevitable pullback can present an excellent opportunity for a longer time frame trade (like holding a trade for several days and maybe even a week as opposed to several minutes to hours). The trick is finding a good point to start fading the move and to have your "uncle point" designated before the trade. Entering a trade on a big pullback can be nerve racking...that's why you really need to have a detailed game plan that you can follow to the T.

I like to use a linear regression channel when I attempt to enter a trade like this. Below is a good 4-hour chart (as in each bar is 4 hours) of the Eur/Usd pair. The light blue lines are the linear regression lines. Linear regression is a concept that says that prices will eventually revert back to an average (reversion to the mean). I've found that this tends to especially work in a trending market with a trending average. Here's the chart:
The yellow circle is the area that I'll be looking to sell the pair, preferably close to the top line. I'll probably take half the position on the initial touch and then wait for the trend following indicators to confirm the sell for the other half.

One other thing that I like to look at to get a feel for how the dollar is doing is the broad dollar index. This index portrays the dollar against a broad selection of currencies to give you a more complete picture. I like that the index is going down and that there seems to be some potential support at the 50 day moving average. I would not be surprised if the dollar index finds support at about the same time that the Eur/Usd pair hits the top of the linear regression channel. The index provides some insight into the breadth of the dollar, which will help to determine if the move is potentially sustainable. It is always nice to see the dollar rallying against several currencies as opposed to the one currency that you're trading it against.

We'll see how the dollar plays out and I'll be sure to post and update soon.

Good luck out there.

TLT

*****Update*****

Several hours after I made this post I was doing my nightly scan through various blogs and I pulled up Moaxian's site. He could not be more bearish on the dollar and he thinks that it will give up all of its gains and fall below 70 on the dollar index. This view obviously goes against my plan to fade the move or "buy the dip" in the dollar but his reasoning is for fundamental reasons.

I'm not saying that he's right or that I'm right, I just think that our different perceptions are interesting. I will still take the trade because fundamental views tend to work against my bottom line, but it is good to note potential macro shifts of this nature and be alert to new trends that may develop.