In our last major update on March 13, I noted that DX was approaching the 61.8% retracement of the drop from 2001 to 2008 and two key channel lines, writing at the time:

The white .618 intersects with two major channel lines… Should DX punch through, there’s much more upside.  Otherwise, look for a correction in the very near future.

As fate would have it, March 13 itself was the high.  DX didn’t go on up and tag the .618.  Instead, it has been forming a slightly falling sideways pattern that would qualify as a flag pattern if it would zip up and tag the potential upper bound.

continued for members…

The pattern makes a lot more sense when seen in the context of the rising red channel from 2011.  It tagged the top on Mar 13, then dropped to tag the midline on Aug 24 — the same day stocks bottomed last month.

Oddly, though, the two previous tags of the flag bottom corresponded with equity rallies.

The switch in correlation makes no sense from a risk avoidance standpoint, as the dollar has typically served as a safe refuge during stock plunges.  But, it speaks volumes about the yen carry trade.

The drop was precipitated by a plunge in USDJPY (yen strengthening), so in this case stocks and the dollar fell together.  Like the EURUSD, however, the correlation between DX and stocks has vacillated.  So, its predictive powers are crimped at the moment.

Looking forward, we can see that DX is wedged right in between the SMA100 (yellow) and the SMA200 (red.)  The current candle even straddles the falling white channel midline.  It would hard for DX to be positioned in a fashion that was any less clear.

We’ll see which was stocks break over the next few days.  If it involves a strengthening yen, then look for DX (and stocks) to sell off again.  It’s made a series of 3 lower lows, while the highs have been pretty much the same.

Probably the key indication, however, will be how it reacts now that it has an opportunity to backtest the SMA200.