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Multiple Forces Align to Support the Dollar

Also, coffee is on the verge of becoming a momentum market.
Author:

Dollar index futures

(DXM3:NYBOT) came under pressure last week but held above the island reversal low pointed out

earlier this month. With the illiquidity of the long Easter and Passover holiday weekend largely out of the way (Europe is closed today), geopolitical risks should play a reduced role for the dollar this week, and the focus should shift to U.S. equities.

While Iraq, North Korea, Syria and Iran loom as potential negative catalysts for the greenback, the upside in equities should support the U.S. currency.

Tech Spec

The price action in the

Nasdaq

last week was clearly constructive. Tellingly, the index added volume Tuesday and Wednesday, and on Thursday it did even better, climbing 2.2% on its second-best volume of the month. Thursday's follow-through advance on heftier trading is noteworthy, since you would expect declining volume ahead of the holiday.

This price-volume action shows a preference for technology issues and a growing appetite for risk-taking, and it gives stock index futures an upside bias coming into the week. The Nasdaq finished last week at a three-month high, priming the Nasdaq 100 to move higher out of a developing Cooper Rule of Four pattern mentioned

last month. Any continuation of the major averages' rally that began March 12 would likely add luster to dollar index futures.

Foreign Exchange

Supporting the view of a higher dollar this week is the failure of the most heavily weighted currency on the dollar index, the

euro FX

(ECM3:CME), to close an overhead gap. This leaves the contract in a head-and-shoulders top formation. Confirmation of the pattern comes on a move below 1.0545.

Also supportive of the dollar is the weak stature of June

Swiss franc

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(SFM3:CME). Swiss francs had rallied as a flight-to-safety play in the build-up to the Iraq invasion. The safe-haven premium built into the Swiss unit continues to be unwound, and the pattern of lower highs and lows is much more bearish than seen in the correlated euro FX contract.

Although they don't affect the value of dollar index futures, June

Australian dollars

(ADM3:CME) have shown extreme resilience by stumbling only once in the past eight sessions. Now, however, they're overbought.

Thursday's price action took the currency to a new contract high, but the market finished weakly, leaving a tail at the high and a double top. Look for this market to pull back and work off some inertia before continuing higher.

Breakfast Futures

July

orange juice

(OJN3:NYBOT) left a tail at a one-month and contract low, the inverse of the Aussie dollar's formation. This sets up a defined-risk, reversal pattern long opportunity with the stop-out point defined at Thursday's 85.30 low. Note that this is a countertrend trade, requiring a tighter than normal trailing stop.

May

coffee's

(KCK3:NYBOT) expansion bar Friday is convincing evidence that the frost fear, a seasonal effect, is in play. Brazil is the largest producer of the common-grade coffee used by the American producers of store-shelf brands. Remember that the southern hemisphere is entering winter, and uncertain weather and the threat of frosts can strongly influences prices. This means volatility is likely. Thusday's expansion bar above the six-week consolidation range and through the lap shown on the next chart sets up coffee as a potential nascent momentum market.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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