Markets chop sideways most of the time. This has been the reality for forex markets for much of the year.
But that’s starting to change as numerous US dollar pairs reach new 10-month highs. The dollar is taking down crucial levels while the US Dollar Index $DXY retests a year-to-date downtrend line and key former highs.
The peculiar coincidence sets up some potentially critical resolutions for these USD pairs.
If they fail, the dollar rally is likely over.
If they hold and additional USD breakouts materialize, selling pressure will intensify for many risk assets.
As of today, quite a few forex pairs are on the verge of supporting a sustained US dollar rally…
Let’s start with the second largest component of the DXY (13.6%), the US dollar-Japanese yen:
To add to that sentiment shift, here is the our internal sentiment composite which includes data from Individual Investors, Advisories, Active Investment Managers, Volatility and the Options Market.
As you can see last year saw some of the most pessimistic levels in history, giving us one of the greatest buying opportunities we've ever seen.
We've had some great trades come out of this small-cap-focused column since we launched it back in 2020 and started rotating it with our flagship bottom-up scan, Under the Hood.
For the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B.
That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
We expanded our universe to include some mid-caps.
To make the cut for our Minor Leaguers list, a company must have a market cap between $1 and $4B.
I always laugh at that one, even as I write this note.
That’s probably because I’ve spent the better part of the past twenty years chasing waves – but I don’t share this Hollywood version of a stoner-surfer ethos regarding life.
But I do follow this mindset when it comes to markets…
From the Desk of Steve Strazza @sstrazza and Alfonso Depablos @Alfcharts
This is one of our favorite bottom-up scans: Follow the Flow.
In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish, but not both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients.
Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.