Almost everyone hates the dollar. How do I know? The latest Daily Sentiment Index (DSI) plumbed a six year low last week at only 8% bulls. This index is a poll of professional US money managers – and back in December, when the Dollar Index was riding high at the 103.50 high, DSI bulls reached 85%. Today it trades at the 92 handle – a fall of over 10%.
Since December, the dollar has been declining as bearish sentiment gathered pace with the Trump Troubles, the growing fear that the Fed would keep interest rates low as GDP data showed continued weakness in the US economy.
On the other side of the coin, the euro was boosted by better reported EU economic conditions and the looming ECB bond tapering programme.
In any case, those were some of the stories the dollar bears told themselves to justify jumping on a bear trend. Actually, that is the real motivation behind all buying or selling of financial assets. If we have a certain bias towards the bull or bear side, it is totally unconscious – and we rationalize these feelings in the conscious by trotting out either the bull or bear story to fit our mood.
This is not the commonly-accepted process of someone being either bullish or bearish – and that is by reading arguments from an expert, you then decide to agree with them. You are convinced by the power of their arguments. That is like putting the cart before the horse.
A great example is this week’s revelations that a footballer is being transferred to another club for a fee of a staggering world-beating £200 million -and he will ‘earn’ a mammoth £20 million a year. That is £540,000 per week! If he plays an average two games a week in the season, his pay will be around £5,000 per minute of playing time. Even lawyers don’t earn that much.
My point is that these huge amounts are the result of extremely positive feelings on the part of the buyer. In other words, they are feeling excitedly bullish about the trade – just like anyone buying the euro at the 1.19 level, as they did last week.
But will this huge spike in football transfer fees and wages mark the top in mood? If so, then stocks are living on borrowed time.
But with yesterday’s US Employment Report release, the dollar shot up as some heavily short dollar positions were closed – and VIP Traders Club members went long.
One of the major features of currency markets is that the waves often can stretch far longer than you would think possible – and put in a spike at the end on a buying/selling exhaustion. That was the feature I was waiting for as I tracked the dollar’s progress down these past few weeks.
And with lovely timing, this was the chart I sent to Club members yesterday morning before the jobs report:
I had a lovely wedge pattern contained between the blue lines and noted the very large momentum divergence as the market declined last week. I believed that if the market could push above the upper blue wedge line, it would trigger a strong short squeeze that would propel the market much higher.
Incidentally, the wedge is also called an ending diagonal by some – and usually indicates a trend reversal that heralds a strong move in the opposite direction.
And the break I was looking for duly arrived on the report’s release and this is how the market finished the week
After breaking the upper wedge line, it took off like a rocket in a small scale third wave as the momentum divergence did its usual thing of producing a strong reversal. Isn’t that pretty?
Next week, all the pundits will be busy changing their tune to explain the move – and will no doubt look no further than the jobs report. Of course, many will opine that nothing has changed – Trump is still in hot water, the Fed is not moving on rates and the euro is still bullish. this is what happens when there is a ‘shock’ to the market.
But for traders who saw this coming, can we look forward to massive dollar gains ahead?
MSM is bearish Crude Oil – and I am not
For a while, most of the references to crude oil in the MSM speaks of “the low oil price” when trying to explain certain economic events. For instance, in the BBC coverage of the turmoil in Venezuela, the unrest and economic decline is partly the result of ‘low oil prices’.
I guess they remember prices above $100 not so very long ago and use that as a reference point. They do not evidently recall prices dropped to $28 in more recent times – and prices have recovered since. Why do they not say that oil prices are strong?
But for traders, we want to know if the current advance is likely to continue. There are all sorts of bearish ‘reasons’ why demand for oil will fall in the years ahead as electric vehicles are now going mainstream. The media has a blitz of such stories on how electric cars will transform the way we travel.
As for supply, fracking is set to expand even further as drillers become ever more expert at extracting more and more oil and gas from their wells.
It appears to be a double bearish whammy for oil. And if you bought into these stories, you would be heavily short the stuff. But I am not – and here’s why:
This is the short term chart and the blue line is a major tramline which has just been penetrated on the upside in a strong bull move. And following that break, the market has consolidated and dipped back to kiss the tramline. In my method, this is an ideal place to go long using a close stop and thus offering a low risk trade (the only ones I am interested in).
Not only that, but with doubts about OPEC’s latest production cut proposals, the market is in a lovely triangle contained within my pink lines. The thing about triangles is that they often herald a continuation of the existing trend – and some appear about half-way along the wave. If so, my immediate target is the $54 area.
Gold falls back after a textbook five up
Gold and silver fell back yesterday as the dollar surged but not before hitting resistance at the meeting of the Fibonacci 78% level and the underside of the major tramline in a traditional kiss:
Of course, I alerted VIP Traders Club members to this beforehand and advised taking some profits near that point. I am now looking at the current wave 2 and when it bottoms, I hope to latch on to another long position ready for a long and strong third wave up.
That move will be very exciting (for the bulls, that is).