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Price & Time: Market Sentiment Too Bullish on USD?

Price & Time: Market Sentiment Too Bullish on USD?

Kristian Kerr, Sr. Currency Strategist

This publication attempts to further explore the concept that mass movements of human psychology, as represented by the financial markets, are subject to the mathematical laws of nature and through the use of various geometric, arithmetic, statistical and cyclical techniques a better understanding of markets and their corresponding movements can be achieved.

To receive other reports from this author via e-mail, sign up to Kristian’s e-mail distribution list via this link.

Foreign Exchange Price & Time at a Glance:

USD/JPY:

PT_USD_Sentiment_body_Picture_4.png, Price & Time: Market Sentiment Too Bullish on USD?

Charts Created using Marketscope – Prepared by Kristian Kerr

  • USD/JPY has moved steadily higher from the 93.80 88.6% retracement of the April to May advance over the past few weeks
  • While above 99.65 our trend bias remains higher in the exchange rate
  • A convergence of the 1x1 Gann angle line of the May high and the 8th square root progression of the June low in the 101.70 area is now a key near-term pivot and a close above is required to maintain the upside tack
  • A medium-term cycle turn window is seen over the next few days
  • The 100.65 level is immediate support, but only aggressive weakness below 99.65 alters the positive near-term technical structure and turns us negative on USD/JPY

Strategy: We like holding long positions while above 99.65, but we also like reducing them into this turn window.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

USD/JPY

*99.65

100.65

101.15

101.40

*101.70

USD/CHF:

PT_USD_Sentiment_body_Picture_3.png, Price & Time: Market Sentiment Too Bullish on USD?

Charts Created using Marketscope – Prepared by Kristian Kerr

  • USD/CHF traded to its highest level in over a month on Tuesday before finding resistance just ahead of the 78.6% retracement of the May to June decline in the .9685 area
  • While above .9565 our trend bias will remain higher in USD/CHF
  • A clear break of .9685 is now needed to set off the next leg higher
  • However, the second half of the week looks like a clear medium-term cycle turn window and a change in trend looks possible during this time
  • A confluence of Gann and Fibonacci levels near .9565 is key support and only clear weakness below this level undermines the immediate positive tone and focuses lower

Strategy: We like holding long positions while the rate is over .9565, but we will start reducing them over the next few days.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

USD/CHF

*0.9565

0.9635

.9665

*.9685

0.9720

XAU/USD:

PT_USD_Sentiment_body_Picture_2.png, Price & Time: Market Sentiment Too Bullish on USD?

Charts Created using Marketscope – Prepared by Kristian Kerr

  • XAU/USD’s current recovery attempt has stalled out around the 2nd square root progression of the year-to-date low in the 1250 area
  • While the metal is below key longer-term retracements at 1282 and 1301 our trend bias will remain lower
  • The latter part of the month looks to be the next cyclical turn window of significance, but short-term cycles studies look generally positive
  • The 1st square root progression of the year’s low at 1214 is immediate support, but back under 1185 is needed to signal a broader downside resumption
  • Only strength above 1301 undermines the negative technical structure and turns us positive on the metal

Strategy: Minor short positions favored while below 1301.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

XAU/USD

*.1185

1214

1249

1282

*1301

Focus Chart of the Day: EUR/USD

PT_USD_Sentiment_body_Picture_1.png, Price & Time: Market Sentiment Too Bullish on USD?

One of our favorite metrics for analyzing extremes in sentiment is the Daily Sentiment Index (DSI) conducted by trade-futures. As a stand alone measure the contrarian index does an excellent job of identiying when markets moves have become overdone. However, we find that when it is combined with cyclical work it becomes even more useful. As we have highlighted in recent notes, the cyclical outlook suggests the dollar is susceptible to a turn of some kind this week against a multitude of different currencies. On Friday, DSI figures reached some rare extremes as EUR, GBP and XAU all printed single digit levels of bullishness (DXY printed 93%). Such one-way conviction is frightening from a contrarian perspective and increases our confidence that a cyclical correction is looming. In the Euro, Thursday or Friday looks like the idealized time for a low.

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

Looking for a way to pinpoint sentiment extremes in the Euro in real time? Try the Speculative Sentiment Index.

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

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

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