US Dollar Rally Quietly Continues To Grind

We're still not hearing much about the US Dollar Index these days. Prices are up 5 consecutive weeks coming into Monday morning and are off to another positive start. This has been a nice quiet rally so far. We like that. From my perspective, even the Euro destruction over past month hasn't caused too much of a disturbance, especially with European stocks hitting new highs and getting all the attention.

I first noticed the excellent risk/reward opportunity on May 8th after the epic reversal in both EURUSD and US Dollar Index that day (see USD 5/12 and EURO 5/22). I think Draghi said something if I'm not mistaken, but I try my best not to concern myself with the 'why'. The price action alone was evidence enough that we likely had a change in trend.

There's two things I want to point out about this ongoing Dollar rally. From a $STUDY point of view, this is just another great example of just how powerful a move can become after a failed breakout (in euro / breakdown in USD). When shorts get caught, like they did in the US Dollar last month, the squeeze can be incredible. If everyone is expecting a huge sell-off (like they were in Dollars last month based on the sentiment data), it is likely not to occur. We had a similar experience with bonds coming into the year. Everyone expected the bond sell-off, so obviously they rallied.

The second, and more relevant question here, is what happens now with these currencies? If there is one thing that I've learned through experience, is that when you have a failed move like this, the trend that it creates tends to last longer than one would expect. In fact, what would traditionally serve as resistance (former support, former highs, moving averages, etc), don't bring as much overhead supply as one might imagine. Prices tend to get through overhead supply (or downside demand) much easier. I think that's what we're seeing here. In my opinion these new trends are likely to continue, especially since we're coming off such extreme bearish levels in the Dollar (bullish sentiment levels in Euro).

Here is the updated daily candlestick chart for US Dollar Index Futures. Look at the failed breakdown on May 8th that originally sparked the rally. Also notice how the recent consolidation has allowed the 50 day moving average to turn around and now has an upward slope. If we can take out 80.80, it looks like that first target will get hit soon. That's not good for the Euro as it represents almost 60% of the Dollar Index:

This is one of the more fascinating market developments in a while. But I don't hear much chatter about it. I get a feeling that as we approach our target, Dollars will be making headlines and we'll start to back off that market and likely look elsewhere. For now, it's all systems go. Nothing not to like.

Related Posts:

The Epic Squeeze Higher in the US Dollar Just Began (May 12, 2014)

The Euro is About To Get Smoked (May 22, 2014)

Tags: $DX_F $EURUSD $FXE $UUP