EURUSD – The recent Euro breakdown has produced a similarly significant shift in forex trading crowd sentiment, pointing to a major Euro/US Dollar reversal and further losses through the foreseeable future. Retail traders have remained net-short the Euro against the US Dollar (ticker: USDOLLAR) since the EURUSD traded above $1.28 in January, giving us a fairly consistent signal that the pair could continue higher. Yet that ratio flipped for the first time in months as of yesterday; it is little exaggeration to claim that the shift could signal a major turnaround.
It will be critical to watch the EURUSD reaction at major support of $1.30 and the 61.8% Fibonacci retracement of the $1.2630-$1.3480 rally at $1.2960. The Dow Jones FXCM Dollar Index itself is trading near critical 8-month highs, and a USDOLLAR break above 10,134 would confirm that a MAJOR reversal in favor of US Dollar strength is underway.
If retail traders grow further net-long EURUSD, we would feel more confident in our bearish forecasts. It truly seems like the Euro and US Dollar are near “make or break” price levels—especially as highs and lows for the month and quarter are quite often set in the first days and weeks of the period. A breakdown would signal further EURUSD losses throughout the second quarter of 2012.
How do we interpret the SSI? Watch an FXCM Expo Presentation that explains the SSI.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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