Chart Of The Day: Expect Volatile Dollar Move After NFPs

Of all the high frequency US economic releases dollar traders follow, the monthly Nonfarm Payrolls report is perhaps the most watched as well as the most influential for markets. Friday's August reading—following Fed Chair Jerome Powell's remarks last week at Jackson Hole which included a significant emphasis on the labor market relative to when tightening might begin—could produce an explosive move for the USD in the aftermath, considering Powell stipulated that continually improving jobs numbers would be a condition for trimming stimulus and raising rates.

Traders are increasingly on the defensive now, after yesterday's very disappointing ADP private sector jobs data. If an improving labor market is the catalyst for the Fed to shorten its support timeline, disappointing data should prolong it—a negative for the dollar whose value would be diluted by the continuous pumping of more greenbacks into the financial system.

Here's what the technical picture looks like:

Dollar Daily

The USD weakened after the ADP release, perhaps precisely because of our  explanation above. The dollar is falling again today for the fifth straight day, for nine out of ten sessions.

Today’s decline is possibly completing a small, month-long H&S top, which included the price weakening below the 50 DMA. A completion of that bearish pattern will set up the possibility of a much larger, similar pattern, developing since mid-June, whose low is between the 100 and 200 DMAs. Should that occur, the current, small H&S top would make up the head for the larger H&S.

The red line at 93.44 traces the Mar. 31 high. Therefore, the Aug. 20 high completed a massive double-bottom, since November. However, that proved to be a bull trap. If the larger H&S top completes, it is likely to propel the value of the dollar back toward the January and May lows, below 90.00. At that point, we’d have to see if we can identify accumulation.

For now, the small H&S is topping out, but the price could still find support by the neckline of the next presumed, larger, H&S top, at around 92.00. It’s also important to remember that even the smaller H&S top is not complete without a closing price. And even then, as we witnessed with the fakeout upside breakout of the large double bottom, the price still could turn around.

For now, both the MACD and the RSI appear bearish. The MACD’s short MA crossed below its long one, providing a sell signal. The RSI demonstrates that momentum is weakening, falling below the July 30 low.

These two indicators don’t always play nicely together either, as they measure different aspects of supply and demand that don’t necessarily work in tandem. One is a measure of pricing and the other is a measure of momentum. The fact that they agree may embolden bears.

Trading Strategies

Conservative traders should wait for the larger H&S top to either complete or fail, reversing positions higher, or to try and complete the huge double-bottom faithfully this time.

Moderate traders would short if the small H&S completes, or go long if it fails.

Aggressive traders could short now, provided they accept the higher risk that corresponds with the higher expected returns of moving before the rest of the market.

Trading Sample

• Entry: 92.50
• Stop-Loss: 92.60
• Risk: 10 pips
• Target: 92.00
• Reward: 50 pips
• Risk:Reward Ratio: 1:5