The first October of the new millennium has not disappointed those looking for the typically higher volatility in the world financial markets during the month. Let's get right at it:

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FOREX Markets

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The U.S. dollar is performing very well against the major world currencies at present. The U.S. dollar index popped to a new yearly high this week, as world economic fundamentals at present do favor the greenback over other currencies. I don't look for the strength of the dollar to abate any time soon-although downside corrections against the major crosses are likely in the near term.

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The Euro currency has been a main topic of discussion in world financial and economic circles recently. The Euro fell to a new low against the U.S. dollar on October 18. Central bank intervention on September 22 popped the Euro higher, but only briefly. While central bank intervention does not occur often, when it does, currency speculators react like sharks sensing blood in the water. The governments' intervention only seems to heighten the plight of the currency they are seeking to defend. There may be more central bank intervention to prop up the Euro. Even though currency intervention is generally unsuccessful--as was the case in the most recent episode--what the intervention does is make for violent whipsaw action that can wipe a speculative trader out of his position-only to have the market resume its previous trend a few days later. With the Euro falling to a new low versus the U.S. dollar this week, this is not a good market to trade right now. The threat of central bank intervention and the fact that new lows are in place makes playing the short side of Euro-Dollar unwise. As for those looking to pick a bottom in Euro-Dollar, that is also unwise. Before I will play the long side of Euro-Dollar, I need to see this currency pair show me some solid strength. One sign of solid strength in this pair would be if the price pushed back up above the high scored right after the central bank intervention on September 22-at .9020.

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U.S. Dollar-Canada Dollar is in a nice bull move at present. After chopping sideways for most of the summer, this FOREX pair broke out on the upside of a resistance zone on the daily bar chart in late September and moved to a new high for the year. The weekly bar chart for the currency pair shows prices in an uptrend since January of this year. Note on the weekly chart (see below) how Dollar-Canada trended higher during most of 1998 and trended lower for all of 1999. Then, the year 2000 has seen prices trend higher. This is a pattern I see in many currency crosses: sustained trends that generally last longer than the trends seen in commodities. I have followed the currency markets on a technical and fundamental basis for many years, and I have noticed that once the currency pairs begin to trend, those trends tend to last a while.

Dollar-yen has not broken out to a new high this year. Several other major currencies have seen the U.S. unit score new yearly highs against them. Technicians can correctly argue that the dollar is short-term overbought against several of the currencies. Meantime, that is not the case with dollar-yen. Dollar-yen spent the summer chopping in a broad trading range marked by the support and resistance levels seen on the chart below. Prices were in a nice uptrend that began in early September, but trade has now turned into more of a sideways affair. Note that the shorter-term moving averages I follow (9- and 18-day) have flashed a sell signal this week. Also note how well these shorter-term moving averages have performed at providing buy and sell signals the past few months. If an uptrend can resume in dollar-yen, the major resistance zone seen on the chart below will be challenged. If prices can break above that resistance zone and then see follow-through strength the next trading session, then dollar-yen could well be a good long-side play for me. I'll keep a close eye on this currency pair. Remember, one of my favorite trading "set-ups" is when prices can punch above stiff resistance or below strong support, and then see follow-through the next session.

The DAX stock index (basis December) chopped in a sideways trading range during late-spring and all summer. Then in September, the DAX broke out on the downside of that range and has established a seven-week-old downtrend on the daily bar chart. A new for-the-move low was scored this week. Prices popped back higher Thursday, but the steep downtrend line seen on the chart is still intact. For the DAX bulls to get back on track, they need to push prices soundly above and negate the downtrend line seen on the chart. If that occurs, it will turn me neutral to this index. Prices need to push above the solid resistance zone seen on the daily chart to turn me from neutral to bullish the DAX. The weekly continuation chart for DAX futures is also bearish. It shows prices in a downtrend since March of this year. Strong support, basis the weekly chart, is seen at the 6230 level in the nearby DAX futures.

The Australian SPI index has seen a dismal month of October (from the bulls' point of view). But this index is certainly not alone in its October woes. The December SPI contract scored a new yearly high in August and then saw a steep descent to the September low at 3202. Prices then mounted a good rally that lasted two weeks, before prices turned down again. There is no doubt the bears have the upper hand in the SPI, at present. But there is a kernel of hope for the bulls. Prices did rebound off the lows on Thursday (Oct. 19) and closed in the upper half of the day's trading range. If prices can show some follow-through strength in coming sessions and push above the 3300 level, odds will increase that a double-bottom reversal will be forming on the daily bar chart. Measuring implications of this double-bottom reversal pattern point to potential gains to above the August high. Before the bulls get too excited, however, remember that prices need to show some strength in coming sessions, or the potential-double bottom will never get the chance to develop. The weekly continuation chart for nearby SPI futures shows this index has been in a nice uptrend since September of 1998. Present price levels in the nearby futures are not even close to penetrating that uptrend line on the downside.

The Euro Bund futures see conflicting technical signals on the daily and weekly bar charts. December bund prices popped to a new high on October 18, but then dropped sharply by the close of the trading session. Prices hit a new weekly low the very next session. Bulls can correctly argue this market was overbought on a short-term basis and due for a correction. However, support at the105.30 level (the Oct. 19 low) needs to hold to allow bulls to hang on to their strong momentum and to keep prices above the month-old uptrend line seen on the daily chart below. However, the weekly continuation chart for nearby Euro Bund futures (also seen below) shows either a symmetrical triangle pattern or a rising wedge pattern forming. Either way, both patterns are potentially bearish. Symmetrical triangle patterns are usually continuation patterns on the charts. Given that the Bund had been in a steep downtrend before the triangle pattern formed, odds favor a downside breakout from the pattern. Also rising wedges are generally bearish chart patterns. Keep in mind, however, that as prices move into the apex area of the triangle (or wedge), the potential pattern becomes less powerful. The most powerful price breakouts from wedges or triangles occur at about the two-thirds to three-quarters point of the completion of the patterns.

Short Sterling futures (December contract) have seen a nice, easy uptrend in place on the daily bar chart all of this year. The absence of excessive volatility suggests there is still more room on the upside in short sterling. What is also positive for short sterling bulls is the fact that during July and August, prices consolidated and formed a congestion area on the daily chart, only to push out above that area and continue to trek higher. Longer-term weekly and monthly charts for nearby short sterling futures do not portend any warning signals that would scare the bulls.

The Swiss Market Index (SMI) is on the defensive on a shorter-term and longer-term chart basis. On the daily bar chart, this index could be in the process of forming a V-Bottom reversal pattern. However, stiff resistance lies just overhead from present levels. (see the daily chart below). Bears still have the upper hand in this stock index, on a daily chart basis, as evidenced by the steep downtrend line drawn off the August high. That uptrend line needs to be soundly penetrated on the upside for the bulls to get back on a level playing field with the bears. Furthermore, the weekly continuation chart for nearby futures shows the SPI has formed a V-Top reversal pattern, with prices presently in a steep downtrend. Bulls have their work cut out for them in the SMI in the coming weeks.

The KOSPI index (December futures) continues in a downtrend that began around the beginning of this year. Just this week, prices scored a new yearly low. About the only technical factor that favors the bulls is that momentum indicators show the index is oversold and likely due for at least an upside correction. Resistance on any upside move comes in at the76.85 area.

A technical indicator I use to determine the strength of a market trend is the powerful Directional Movement Indicator (DMI), also called the Directional Movement System.

I'll explain the basics of the DMI to you first, and then, importantly, I want to share with you how I use the DMI, as well as other computer-generated signals such as the Relative Strength Index (RSI) and Slow Stochastics in my trading decisions.

The DMI is a trend-following system developed by Welles Wilder. The Average Directional Movement index, or ADX, is part of the DMI and determines the market trend. When used with the up and down Directional Indicator (DI) values--Plus DI and Minus DI--the Directional Movement Indicator is considered a trading system.

The rules for using the Directional Movement Indicator are: You establish a long position whenever the Plus DI crosses above the Minus DI. You reverse that position, liquidate the long position and establish a short position, when the Minus DI crosses above the Plus DI. There are some other rules to help prevent getting whipsawed by choppy markets, but I won't touch on them here.

For some traders, the most significant use of the ADX is the "turning-point" concept. First, the ADX must be above both DI lines. When the ADX turns lower, the market often reverses the current trend. The ADX serves as a warning for a market about to change direction. The main exception to this rule is a strong bull market during a blow-off stage. The ADX turns lower only to turn higher a few days later.

I use the DMI mainly to determine the strength of a market trend-either up or down. I look at the ADX line of the DMI. If the ADX line is trading above 30, then the market is in a strong trend. If the ADX line is below 30, it means the trend is not a strong one. Importantly, if the market is in a solid trend and scoring new highs (or lows), and the ADX line shows divergence and turns down, then that is one warning signal that the market trend is losing power and a market top or bottom may be close at hand. Even if the ADX line is well above the 30 level and starts to turn down at the same time the market is trading near new highs or lows, that is also a signal the trend is losing some power. However, as long as the ADX line is above 30, you should still consider a strong trend to be in effect.

As mentioned above, some traders use the DMI as a complete trading system. Also, some traders use the RSI or Slow Stochastics, or well other computer-generated technical indicators, for determining entry and exit points. I don't and here's why: I consider these computer-generated technical indicators to be secondary, yet still important, trading tools. I will use these "secondary tools" to help me confirm or reject ideas that are based on my "primary tools"-which are basic chart patterns, support and resistance levels and trendlines.

Did you happen to read my article I wrote on FutureSource.com this week? It was a feature on futures trader Linda Bradford Raschke. She is one of the best-known traders in the world. She, too, advocates the use of basic technical tools that have been around longer than computers. Renowned technical analyst John J. Murphy also says the best trading tools are the basic ones. In fact, I've been attending trading conferences for many years and the vast majority of traders speaking at the conferences consider these same basic charting techniques as their primary trading tools. You should, too.

That's it for now. Next time, we'll tackle another important trading issue, on your quest to becoming a more successful trader.

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Disclaimer: There is a risk of financial loss in futures and options trading. Futures trading is neither easy nor an easy way to make money. It takes hard work to have success. Please use sound money management when trading futures. Past performance is not necessarily indicative of future results. Nothing in this newsletter is intended to be a trading recommendation for you to buy or sell futures or options. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Readers are solely responsible for how they use the information in this newsletter.