The Epic Squeeze Higher in US Dollars Just Began

How many people do you know that would agree with that headline? I personally don’t know anyone talking about or moving money aggressively into the greenback. We love that. This is one of the reasons why I believe that we’re in the early innings of an epic squeeze higher in the US Dollar Index. But there’s a lot more going on in this market that I think is worth pointing out.

The first chart is a longer-term weekly view to help put things in perspective. This one goes back a few years and you can see a nice textbook topping pattern. When prices break the “neckline” support, they’re taught that it’s time to sell it short. That’s precisely what occurred last week, temporarily. I put two different trendlines here that make the most sense to me:

 5-11-14 DX weekly

We’re looking at a simple bar chart in order to clear out all the noise. This allows us to focus on the big round topping pattern that has been developing since 2011. But the next chart gives us a closer view at what happened last week. Look at the brief breakdown below this key support that quickly recovered to close back above that level on Thursday, and more importantly for the week. This is how the best short squeezes are born my friends: from failed breakdowns.

 5-11-14 DX daily

Now we’re really just waiting for these two trendlines to be broken to the upside in order to confirm the bullish thesis. Fortunately for us US Dollar Bulls, the Euro is rolling over at very important resistance. Look at the downtrend line in the $EURUSD going back to the highs in 2008. Remember the Euro represents close to 60% of the entire US Dollar Index. So if the Euro rolls over here, as it looks like it’s doing, this will give US Dollars a huge boost:

5-11-14 eurusd

The big Euro reversal last  week helped the US Dollar bounce back after that brief breakdown. I started Tweeting about it on Stocktwits Thursday afternoon when we first saw the intraday reversal take place:

5-8-14 stocktwits

And then we got some nice follow through from price on Friday:

5-11-14 stocktwits 2

I wanted to share these tweets so you can see thought process in real time. When I see these failed breakdowns coming at multi-year support, it really gets my attention. These make the best trades because the risk/reward overwhelmingly favors the bulls. If prices break below last week’s lows, then this thesis is wrong, at least temporarily, and all bets are off. But if this indeed is the beginning of a huge rally, the profit potential is unparalleled.

So what’s going to be the catalyst to take the US Dollar a lot higher? Getting back to my original point, I don’t know anyone who is pounding the table on the US Dollar Index. Although this may be somewhat anecdotal, the sentiment data backs it up. The chart below is a Public Opinion index based on a combination of well established surveys including Consensus Inc, Bloomberg, Ned Davis Research, Market Vane, Larry Williams and the Daily Sentiment Index. Remember that people tend to think alike. We have a human flaw that we refer to as, “the herd mentality”. This is something we have to be aware of as market participants and try our best to take advantage of it:

 5-11-14 dollar sentiment

There generally tends to be a lot of random noise when it comes to sentiment readings, so we only really want to pay attention when they start t0 reach extreme levels. The upper and lower bands represent 1.5 standard deviations above and below a 1-year moving average. Since we’re using a relative measure of extremes, the buying opportunities come when the public is too pessimistic about its prospects for gains compared to their opinion over the past year. Big sell-offs don’t happen when everyone expects it. And this data is telling us that the crowd is positioned for a big sell-off. So I’d prefer to take the other side of that.

We use this sentiment as a more intermediate to long-term indicator. So it makes the most sense to compare this data with the weekly price chart. From a structural perspective, this first sets the stage. The key reversal day last Thursday gives us the entry point. Friday’s follow through confirms our initial idea. Now, we can keep buying on any pullbacks this week (if we get them) knowing that we only want to be long US Dollar above last Thursday’s lows.

I think this could be the start of something real. I really do.

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Source:

Public Opinion on US Dollar (Sentiment Trader)

Tags: $UUP $DX_F $EURUSD $FXE


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