Mornin’ folks, RJ here again standing in for FT who is on holidays. Well, I hope we’re all rested after the weekend and ready to take on the markets again. I know I am. I barricaded myself indoors away from this new Irish monsoon season we apparently have now and spent hours educating myself on the finer points of Olympic synchronised diving. And beach volleyball. Any sport which enforces the use of regulation size small bikinis gets my vote.

Well, last week was a big week for the dollar, and it made six-month highs against a basket of currencies. The euro led the charge, dropping below $1.50, and Friday was its biggest one day drop since January 2001. It was a tough week trading currencies for me, and I found myself on the wrong side of the market on a few occasions, getting caught out buying cable, GBPUSD. Thankfully some well-timed trades in the FTSE, as outlined in my last diary, saved my bacon!

What to do about this dollar strength though? How am I going to trade it? Well, Trichet’s damning comments about the European economic outlook no doubt was a driving force in the dollar’s strength against the euro. I can only assume that after such huge gains that there will be some further strength in the dollar this week. A move like that normally has some follow through. The next support area would seem to target $1.4800 or so.

In the wider picture though, why should I be long the greenback? The U.S. housing market is still in deep trouble, the banking crisis is still very real, trade deficits and concerns of a widening budget all make me question whether this dollar has really turned and if we have seen the bottom of the market as some have suggested.

Obviously, I am not the only one. Listen to this: Morgan Stanley reckon the dollar will approach its lows again by October. A survey of 39 analysts by Bloomberg gave an average year end target of $1.51 to the euro. Barclays says that its 5% gain in the last three weeks can’t be sustained, and with this slowing U.S. economy, the Fed is looking increasingly unlikely to raise rates anytime soon. I am not surprised that Bank of America has been advising to exit trades betting on the dollar posting more gains against the euro.

I have been discussing Technical Analysis and its merits recently, and explained the significance of the head and shoulders pattern in my last diary entry. It is normally seen as a major reversal pattern. Chart patterns can be described as either reversal patterns, where the trend changes direction and reverses itself, or continuation patterns, where the price move keeps going. Continuation patterns are formations made up of sideways price action, and are normally nothing more than a pause before the trend continues in the same direction as before. While reversal patterns can take a long time to form, continuation patterns are normally much shorter term. Today I want to describe briefly another major reversal pattern, the Double Top.

The Double Top is seen almost as much as the head-and-shoulders reversal pattern and obviously looks like an ‘M’. You can see this reversal pattern at bottoms too, just inverted. The double bottom resembles a ‘W’.

General characteristics of a double top are similar to that of the head and shoulders, but obviously only has two peaks instead of three. Look at the chart below of the FTSE to see it in action. The market rallies to point A, with strong increasing momentum and usually high volume too. Then it declines to point B on decreasing momentum and when it finds support it looks just like a market in a usual uptrend. However, the next rally to point C fails to break the previous peak at point A. Not only that, but it reaches about the same price level but on much lower momentum. We start to question this uptrend, and a potential double top is formed.

The key here is the price break to the downside when it breaks the support we had at B. This is our confirmation that the uptrend is over and we should be looking to sell. Much like the head and shoulders pattern, the price target can be reached by measuring the height of the double top, and projecting it downwards from the break out point.

In daily use, there can be problems applying this technique because markets won’t always behave as our analysis wants them to. It can cause problems when the second peak is higher than the first one. It can be hard to say if the pullback from the second peak is the double top in formation or if it is just the uptrend continuing. I find, though, that there are a couple of things that help to clarify this. One is timeframe – the longer the time it takes between the two peaks, and the greater the height of the trough between them, the more serious the potential for the reversal is. On a daily chart I would like to see a minimum of about a month between peaks. Also, as I have mentioned, the divergence of momentum can be a real confirmation that the uptrend is weakening on the rally to the second peak. You can apply the same logic to double bottoms. Just think of them as mirror images of double tops.

Good luck poring over those charts looking for double tops! (I have that announcer’s voice from the darts in my head saying ‘double top’. Bobby George is it?)

Right, more about my own trading today. I hope the rest of you are cleaning up. Monday morning thus far I haven’t done a lot of trading. I have been looking at the EURUSD this morning, expecting some volatility and a while ago just got long and bought the market. Partly on a hunch, partly because of what I mentioned about the dollar at the start of this diary, and because I like the mental support level of $1.50 I bought the market at 1.5010, just after 1pm. Stochastics are coming back from oversold levels. I would like to take 20pips or so out of this trade, and I will be keeping a close eye on my exit in case this market breaks down. Fibonnaci Retracement levels are something else that I keep an eye on, and are available in the charting tools at your disposal.

Well, let’s see how she pans out. I am interested in the Dow today after Friday’s mammoth gains. I think it is going to be an interesting week. Maybe we will have a better idea of what to expect coming in the weeks and months if we can just get a bit of direction and stability by Friday! Good luck trading today folks, I hope you get the week off to a flying start!