[Chart of the Week] Is The Market Ready For A US Dollar Collapse?

JC Parets
September 18, 2018

We're always focused on positioning. Stocks don't go up because of some article written by a 26 year old journalist who has never made a trade in her life. Stocks move based on positioning from institutions. When the market is caught leaning the wrong way, the unwind can create spectacular moves. This is the key to the market: positioning, not the noisy media.

As many of you know, every single day I look for risk vs reward opportunities that are skewed in our favor. We're not here to be right, we're only here to make money. There is a big difference between the two. In other words, we don't care if we get it wrong. We just want to make sure that when we are right, that we're really really right. Isolating asymmetric risk vs reward opportunities is how we do that, and I believe we do it very well.

I really don't think this market is ready for the US Dollar to collapse. We've had a monster rally in the Greenback all year and emerging markets and precious metals have felt the pain. I believe that's about to change dramatically.

When I look at positioning in precious metals, I'm seeing Commercial Hedgers, the "smart money", with their largest net long positions of all time! Commercial Hedgers actually do "hedge" when it comes to Gold and Silver. They're almost never ever long and carry a net short position almost 100% of the time, the question is just how short. But not today!

Silver Hedgers are actually net long over 12,000 contracts, something we have never seen, ever.

Gold Hedgers are net long as well for the first time in a couple of decades. Last time they even came close to being net long was in December of 2015, right before we got one of the most violent rallies in Precious Metals stocks that we've ever seen!

We laid out the bull case for Precious Metals last week and it's starting to play out. But what will the catalyst be to take them much higher? I think it's the US Dollar.

Remember that the Euro represents approximately 60% of the entire US Dollar Index. Here is how the $EURUSD chart looks to me. I see a "very obvious" head & shoulders top developing over the past year. You know what happens with "very obvious" head & shoulders patterns right? They don't work out (See Exhibit A, B, C & D):

Head & Shoulders tops are supposed to resolve themselves to the downside once breaking the neckline, which is the support level at the bottom end of the range. In this case, the neckline is about 115-116 in $EURUSD. The problem is that these patterns rarely work out the way the book says they should. In fact, we often get a whipsaw, or brief breakdown, and then an immediate reversal back above the neckline which triggers the face ripper.

In this case, we got that breakdown in August, right in the heart of Whipsaw Hunting Season and now we're back above key support. The way I learned it, "From Failed Moves, Come Fast Moves In The Opposite Direction". I can totally see a rally develop back towards 125-126 in $EURUSD.

So what does that mean for the US Dollar Index itself? This one still looks like it's in no-man's land. Unless we're below 94, I see little reason to be short, especially with the repercussions a healthy stock market could have on the Yen. I think for the Precious Metals trades that have set up nicely, we want to focus more on the $EURUSD and less on the Dollar Index itself.

Nevertheless, this 94 level is big. A rally in $EURUSD should send the US Dollar index tumbling and potentially retesting those lows from earlier in the year. 94 is the price we're watching:

I think a US Dollar collapse will catch many off guard. A precious metals rally, emerging market stocks rally and Euro rally should all occur simultaneously if this thesis is correct. And if it's not, our levels are well defined so that we can live to fight another day.

We're not cult followers like many of these gold bugs have been for years losing tons and tons of money along the way, not just from making bad investments but the opportunity costs adding up as well. There is a lot of pain being felt in the precious metals world and I think many have just thrown in the towel and given up on the whole thing. We like that. I'm happy to take the other side.

Let me know what you think!

JC

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