USD Index: Easy as A-B-C

Following two weeks of losses we should not lose sight of the fact that every good trend needs a correction. The trick now is to identify the end of this correction.

The fact remains that USD bulls switched to their highest number of long positions since records began. Whilst this has cooled off slightly it is certainly nothing to become too bearish about at this stage. With over $40bn of long positions currently being held near the multi-year highs this favours an [eventual] resumption of the bullish trend. However current price action continues to appear corrective and is producing a potential Bullish Wedge or Zig-Zig. Whilst this is a reasonable assumption we do not yet know how deep this may end up being.

However there is a clue provided by last Wednesday's Bearish Engulfing candle, which makes this a probably swing high and potentials wave 'b' as part of an A-B-C correction. Due to the increased volume on this bearish candle it suggests further downside is a higher probability before we see a resumption of the bullish trend. Now to find the potential end of wave 'C'.

84 houses several technical support levels, which includes the September swing low, a narrow band of sideways trading (which tends to act as a cushion once retested) and the 50-day MA. If we see this level hold as support and provide a basing pattern then we can assume the end of the A-B-C correction and seek buying opportunities on DXY or Dollar crosses.

However we also run the risk of seeing a far deeper and more complex correction but we can worry about this if we break below 84.

Whilst we remain within a technical correction then we can use this information to remain cautious on Dollar crosses and expect whipsaw action to continue (AUDUSD is a prime example). If we correctly identify the end of wave C then we can assume the return of trends, and trade accordingly using the correct trading strategy.