Analysis of the trading-volume patterns associated with index value changes suggests that relative weakness of the buying force concerning the US dollar has emerged since March 2016. If this weakness persists, it will create circumstances favorable to a pattern if disorderly price changes. That will happen independently of fundamental factors.
The phrase "relative weakness of the buying force" used above means a large imbalance of strength between buying and selling forces, and one that favors the sellers. Here the word "strength" is more associated with the volume patterns linked to notable price changes, and not to the price changes alone.
Chart 1 illustrates the use of this concept. The underlying statistical indicator is the old money-flow measure. It remains useful in helping to focus attention on the volume imbalances that often drive price changes.
This chart makes use of daily aggregates of trading volume and High and Low values for the US Dollar Index. The blue curve marks volume surges associated with price up-ticks, and the red curve marks surges connected to price down-ticks. The purple curve marks the closing price of the day. Chart 1 deals with only volumes that are larger than the median daily volume over the period of observation -- called “big volumes”, to focus on the most influential price setters. A full introduction to the design of this chart and the interpretation of the intraday patterns of price and volume are given at https://arawak-infosys.myshopify.com/collections/all .
Chart 1 shows a relative absence of blue volume spikes after March 1. This means relative weakness of buying force among the big traders. From March to June 9, red-volume surges (net selling pressure) greatly outnumber blue -surges (net buying pressure).
When we reflect upon the implications of the buying-force weakness shown by Chart 1, it seems not surprising to have a massive price crash such as that which took place on June 3 following the disappointing jobs report from the Bureau of Labor Statistics.
Chart 2 suggests that this crash was a disorderly price change. This chart presents volume spikes found among one-minute time slots from 2:15 PM on June 2 to 10:30 AM on June 3 for the trading of UUP, the PowerShares DB US Dollar Bullish Fund (NYSE:UUP).
A key message of this chart is that an over-the-cliff dive of 1.4% in the ETF’s price ($24.75 to $24.40 -- UUP usually trades in a narrow range) took place between Market Close on June 2 and Market Open on June 3. (See the gap shown by the purple curve.) Trading robots are reportedly quite active during the Market-Closed hours.
The trading pattern shown in Chart 2 is consistent with the fact that the US Dollar index did its own over-the-cliff dive that Friday morning, June 3. The pattern for this Index is shown in a chart of intraday values from June 2 to June 3 at http://www.barchart.com/interactive_charts/stocks/$DXY.
Prolongation of the US Dollar Index’s weak technical condition since March means that a string of bad and unexpected news for the US dollar might produce a downward-sloping trend channel for the US Dollar Index. The news would be the key driver of the formation of the channel; but the technical condition will contribute to the steepness of its slope.
This is not a forecast that such a downward sloping trend channel will appear. It is a generalization about the consequences of persistence in the said technical weakness. The key take-away here is that while we may be anxious to find the fundamental factors that might produce sharp changes in the value of the US Dollar Index, it is good to also be attentive to the said technical condition of the marketplace. This condition involves the changing volumes of orders at different ‘rungs of the ladders’ of bid and ask prices.
Disclaimer: This article is not advice to buy or sell any securities or to pursue any investment strategy. I am not a licensed investment advisor. I have no position in securities mentioned herein. Please use this article only as a source on information in setting up your due diligence about investing. I have tried hard to avoid introducing inaccuracies in the data and inappropriate interpretations; however, I offer no guarantees of accuracy or fitness for use of materials in this article.