Trade Implications – EURUSD: We usually use our Speculative Sentiment Index data as a contrarian indicator to price action—if everyone’s buying we look to sell and vice versa. The fact that there are nearly 4 traders short EURUSD for everyone long would normally leave us in favor of further Euro strength.
Yet retail crowds are likewise frequently on the correct side of the trade at major turns. Sentiment extremes are only clear in hindsight, but a Euro failure at June’s high of $1.34 leaves distinct risk of reversal. Our sentiment-based Momentum2 trading system is currently long EURUSD, but a flip to a short order would be the first sign of a potential turnaround.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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