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A Crowded Trade?

A Crowded Trade?

Kristian Kerr, Sr. Currency Strategist

Talking Points

  • Sentiment at multi-year extremes is several major currencies
  • Key long term-retracement ahead in the US Dollar Index

Unfamiliar with Gann Square Root Relationships? Learn more about them HERE.

The FXCM US Dollar Index traded sharply higher since bottoming around the key cycle turn window we highlighted last week (Read HERE). However, we are now starting to wonder if the index has gone “too far too fast” as sentiment towards the Buck is once again at or near multi-year extremes. On Thursday, for instance, our favorite metric for measuring sentiment the Daily Sentiment Index or DSI saw extreme readings in the euro, yen and franc as they all fell to just 3% bulls. Conversely the DSI for the ICE Dollar Index showed a reading of 95% bulls. From a contrarian standpoint, such deep conviction in the direction of the dollar is a bit unnerving to say the least - especially heading into payrolls. Interestingly we had a similar setup last month around payrolls as the euro printed 3% bulls on the DSI the day of the release. This led to a sharp rally in the single currency the following week as positions were adjusted. Of course the same thing doesn’t have to happen here, but with market participants all seemingly leaning the same way we wouldn’t completely discount it either. In the FXCM US Dollar Index the key price level to watch looks to be 11,310 as this marks the 78.6% retracement of the 2009-2011 decline. A clear failure around here could see the index come under a bit of pressure.

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FXCM US Dollar Index Daily Chart: November 7, 2014

A Crowded Trade?

Charts Created using Marketscope – Prepared by Kristian Kerr

Key Event Risk in the Week Ahead:

A Crowded Trade?

LEVELS TO WATCH

Resistance: 11,310 (Fibonacci), 11,365 (Fibonacci)

Support: 11,255 (Fibonacci), 11,153 (WTD low)

Strategy: Sell FXCM US Dollar Index

Entry: Sell FXCM US Dollar Index next week if it fails to close above 11,310 over the next couple of sessions

Stop: 1-day close above 11,365

Target: 11,160

--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

To contact Kristian, e-mail instructor@dailyfx.com. Follow me on Twitter at@KKerrFX.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES