Mighty Greenback

Win DXY? The Mighty Greenback

By WoSS CapitalPosted on Posted in Educational, ForEx, Market, Trading

I’ve had it in mind to write an educational post around Market Structure for a while, at least the way I think about and use it to create my narrative for Trading Bias through the Timeframes. As I was mapping out the latest structures on DXY around this weeks CPI news event, discussing with Technical Analyst peers as I went, it seemed like a better idea to focus on DXY itself and how it’s currently moving, as something of an intro into that structural discussion as well as an outlook on potential future direction.

CPI News Day

Let’s start with Thursday itself, 13th October, CPI news day. These high impact news events are always choppy and often times better left alone till things settle.

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We know DXY has a profound impact on the movement of Risk On assets, inversely correlated, so even when not trading USD directly, connected pairs in the ForEx world, along with Crypto and Indexes move against DXY in general terms.

Now, looking at Thursday, its hard to imagine anyone trading with a stop loss around the breaking news got out alive. In general terms, we saw price develop into a narrow range through Wednesday and overnight into Thursday morning before then taking out liquidity on both sides of the range, once below before the news break for early longs playing the previous days higher PPI as an indication of higher than forecast CPI, then taking out short stops above the range, before finally falling through once more to take the longs who didn’t cash out quickly after the strong opening move.

“So what is the significance of your opening gambit around Market Structure in all this?”, I hear you ask. Well, I along with some of those peers mentioned above were discussing this live as it happened in Discord and the Structure played a key role in my thinking around where the eventual destination of the day was likely to be, which led to a wider discussion on overall Macro direction of travel. That’s what we’re going to look at here.

Multi Timeframe Market Structure: Price is Fractal

I want to start by setting the scene around Market Structure, particularly as applied in fractal nature looking up and down through the timeframes. “Price is Fractal” is an overly repeated phrase in the world of Technical Analysis and it often comes verbatim from something someone has heard or read without any real explanation of what it means in the context of the discussion being had. So I want to be clear from the outset in terms of what I mean when I say “Price is Fractal” from a structural perspective looking through the timeframes.

Major & Minor Structure

The first thing to understand in this context is the difference between Major and Minor structural swing points. When looking at a price chart its never quite as clean as the uptrend and downtrend examples used in most of the educational content, price is rarely that obvious or linear. And this leads to many new analysts looking at all highs and lows equally, rather than working on being able to pick out the key structural highs and lows for the timeframe they’re looking at.

My rules for Major structure are fairly straightforward and I think also fairly common from a structural perspective.

On the timeframe you are looking at a Major swing low is created at the lowest point that led to the break of the previous Major swing high by candle body close (not wick), and a new Major swing high is created at the highest point with a timeframe -1 break of structure inside of a timeframe +1 Point of Interest. This is how Major structure in Bullish OrderFlow presents.

Similarly, when OrderFlow is Bearish, a Major swing high is created at the highest point that led to the break of the previous Major swing low by candle body close (not wick), and a new Major swing low is created at the lowest point within a timeframe -1 break of structure inside of a timeframe +1 Point of Interest.

This sounds a lot more complicated written down than it actually is.

Consider the DXY chart here at a Daily level (you can click to enlarge). I have mapped out all of the Major swing highs and lows as I see them. You’ll note that not every high or low is denoted as major.

OrderFlow here is Bullish, so what I am looking for is a High that broke the previous Major high and then a pullback. That gives me a new Major high. The Lowest low between the previous Major high and the new Major high is the new Major low.

Any additional highs and lows in between are Minor (or sub structure) on this timeframe, and not relevant to the overall bias we have around the movement of Price.

This is a fairly straightforward example of a market moving in a single direction. To illustrate the point the lower image is of the Bitcoin chart over the last, roughly, 2 years, with all the Major swing points mapped out (again as I see them).

Notice how when the noise of all the minor, substructure highs and lows is filtered out by concentrating on only the Major Structure, the shift in Market OrderFlow becomes more apparent?

At both tops we see the major low broken, the major high untested, a retracement into a POI within the Trading Range, then a second structural break of the low. Easy in hindsight and I wont even begin to suggest I caught these highs at the time (I didn’t, but like to think now I have refined this process I would if given the chance again!).

So what is the significance of the Minor highs and lows, the substructure?

Well, without going into too much detail here, the simplest answer is: Those are generally major structure on your lower timeframes and these are where your first clues about the higher timeframe movement can be found.

Click Images to enlarge

Click Image to Enlarge

This is a high level depiction of a higher timeframe major structure with a lower timeframe major structure within in. It is difficult to draw, but consider a lower timeframe structure inside each leg again, and a lower timeframe again structure inside each leg of that. This is Fractal Price.

Think of it like this:

  • Daily Structure is Weekly Substructure (mostly)
  • H4 Structure is Daily Substructure (mostly)
  • H1 Structure is H4 Substructure (mostly)
  • m15 Structure is H1 Substructure (mostly)

And so on. (NOTE: These are the timeframes I use, other timeframes are available 🙂 )

And taking this a step further:

  • Weekly Bullish, Daily Bearish = Weekly Retracement
  • Daily returns to Bullish = Weekly Continuation to take Weekly high
  • Daily Bullish, H4 Bearish = Daily Retracement
  • H4 returns to Bullish, Daily Continuation to take Daily high
  • H4 Bullish, H1 Bearish = H4 Retracement
  • H1 returns to Bullish = H4 continuation to take H4 high
  • H1 Bullish, m15 Bearish = H1 Retracement
  • m15 returns to Bullish = H1 continuation to take H1 high

And obviously the inverse for Bearish OrderFlow

Back to DXY

OK, now we have that high level Structural information covered, why was that significant for DXY this week and why is it significant for the future?

Zooming in here on the previous Major DXY structure points to the latest Trading Range, which I have highlighted, we can see that the Daily created a new high then began to retrace. With the above in mind, the H4 should support that right?

It does indeed. We can see here that the Daily created a high (inside of a Weekly PoI incidentally) and the H4 structure shifted from Bullish, in confluence with the Daily, to Bearish, breaking the low and reverting to lower highs and lower lows. Remember, H4 Bearish and Daily Bullish signifies Daily retrace, so we’re looking for Daily PoI’s for that H4 to start hinting that the retrace is done.

The H4 reached a Daily Imbalance, below 50% (or Equilibrium) then broke structure again to the upside. This could be our first indication that the Daily retrace is complete and we are heading towards a new high above $114.

What about the Hourly, does that support?

Again, it does indeed. The blue dots from the low show the initial structure shift in confluence with the H4 (meaning Daily, H4 and H1 were all Bullish), before price took out the H4 high and hit an H4 PoI. What do we expect there? H1 to shift and give the H4 retracement.

We can see here that the H1 had broken structure from that PoI BEFORE the CPI news was released. It had broken structure to the downside and the consolidation range pre CPI was right at the top of the Trading Range, leaving it a hop, skip and jump from claiming liquidity above before continuation on its merry way within the pre-existing structure at Daily, H4 and H1 levels.

The expectation should have been for the H1 low to be taken as the H4 was now in retracement, certainly this was my published position prior to the day, and this is what happened in the end, after the impact from the news took liquidity every which way but loose. The H1 is currently now retracing again after taking its low (m15 Bullish, looking for a reaction from an H1 PoI).

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OK, so what now?

Well, as always in the TA game, nothing is for sure. We do our best to look at what is the most probable outcome and manage Risk accordingly in that direction while monitoring the data as it is printed and re-assessing accordingly if something we’re not expecting comes along.

For me, at the moment, the key areas are:

  • The H1 High: a break of that would signal a potential reversal again into the H4 impulsive move. I don’t believe the H4 retrace has gone far enough for that yet, but I remain open to the possibility.
  • The H1 Low: In this structure I would expect this to be taken again to continue the H4 retrace. There’s a PoI between 111.4 and 111.7 that I will be watching for H4 retrace low, should the H1 confirm
  • The H4 Low: If the Daily retrace is not complete (and we see an H4 ABC structure) then the H4 low is likely to fall with the H4 returning to Bearish posture. If this happens, we are on Daily reversal watch again into a Weekly retracement.

Of these, IMO, the second is the most probable. The Daily is Bullish, as is the Weekly so that OrderFlow carries more weight. H4 has retraced the Daily into a valid PoI inside its Trading Range and broken Bullish again in confluence, which means I favour a break of the Daily High now and continuation, unless something changes on H4 (led by H1).

I was having an interesting conversation about this with a friend who concentrates solely on Macro Analysis these days (https://twitter.com/def_project @def_project on Twitter, check out his macro work across assets) and we got into the debate around the DXY reaching out potentially to $117-$120 on breaking the Daily high.

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Credit @def_project

He does a lot of work with channels and is infinitely better at that particular technique than I (I don’t use channels at all as he’ll smile at me saying – I remind him often in jest!) and his current outlook would suggest that $117 would be the top for DXY this year, $120 out to 2024 at the earliest unless the current Bullish Channel is broken. But in all of his analysis, going back multiple assets over hundreds of years of data, Bullish channels break Bearish the vast majority of the time (and vice versa, Bearish break Bullish). In fact, he couldn’t recall (or find) a single example of a Bullish channel (at the Macro level) creating another Bullish channel.

You can see the charts we were discussing to the left.

One of the most interesting points that came up in that discussion, outside of our slightly differing views on $120 and $117, was around the fib channel you can see in all these images. Again, this is not a technique I use so I cant comment on the TA style, only on my knowledge of Def’s TA and how often he’s been right with these things (and how often the price levels line up with my own, even if a different method).

The observation was that the DXY has only broken the 0.786 of this fib channel to the upside once in recent history and as a result we were discussing this as an outlier, till I looked at the time period.

1982-84. Or for those of us who were alive and remember, the last time that we had rising Inflation and Interest rates around the world. Of course, it could be a complete coincidence that we are talking about the potential for breaking that level again towards $117/$120 under similar economic circumstances, but it was certainly a talking point that came from this analysis and something to keep in mind as a point of interest. History rhymes and all that!

In my view, the current Macro Structure on DXY, as we’ve covered in detail above, certainly supports up as current direction of travel. Unless that structure breaks from the Weekly down.

Thanks for reading and thanks to @def_project for the use of his charts to cover this interesting point as part of this article.

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