U.S. Dollar Bullishness Hits Record High

Posted on March 26, 2013 by Andrew Thrasher — No Comments ↓

I’m pretty busy this morning but wanted to get this one chart posted. The dollar has been rallying since February and the PowerShares U.S. Dollar Bullish ETF ($UUP) is up a little over 4% from its 2013 low. This bounce in the dollar has caused a large shift in bullishness for the U.S. currency, with long positions hitting record highs based on COT data.

Here’s a chart produced by SentimenTrader via Business Insider that shows the number of net long positions of large speculators (which are primarily hedge funds) in the dollar hitting record highs. It’s important to note that past peaks in net long positions have not been associated with highs in the dollar. Just like in equities, we typically see sentiment top out before price does. So while it’s possible for the dollar to take a breather, this frothy sentiment isn’t as short-term bearish as some would have you believe.

Source: The Number Of Bets On The US Dollar Has Never Been Higher (Business Insider)

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Dollar Creating a Head and Shoulders Pattern

Posted on December 19, 2012 by Andrew Thrasher — No Comments ↓

No, the U.S. dollar doesn’t have a dandruff problem (sorry, bad joke). There seems to be a lot of discussion, at least by those I follow on Twitter and in the blogs I read about the bearishness of the dollar. There has been a head and shoulders chart pattern that’s setup in the PowerShares US Dollar Index Bullish ETF ($UUP) that gives credence to those negative on the dollar.

This pattern gets discussed pretty often as it lurks it’s bearish head. One of things that frustrates me when I see it mentioned is the lack of analysis given to volume. With price action creating the necessary chart pattern, this only gives us half the equation. What many people leave out is the necessary volume requirements associated with a head and shoulders pattern (H&S). Like many setups, volume typically trails off during the patterns completion. H&S is no different.

The largest amount of volume should be observed during the top of the left shoulder, when the head is created volume should be slightly lower and then even lower when we get the right shoulder. By each rally attempt being accompanied by weaker volume we can see the bears stepping in and whacking down any attempt at an advance. This is part of what makes the pattern bearish.

When looking at the above chart of $UUP we can see that volume does in fact confirm the H&S pattern that price is showing us. From here we are looking to see if price falls below the trend line, completing the pattern. It’s important to remember that oftentimes when price breaks the ‘neck line’ of a H&S pattern it will bounce and re-test. This can act as a confirmation of further weakness if what once was support becomes resistance.

The Dollar May Need a Breather

Posted on May 24, 2012 by Andrew Thrasher — 1 Comment ↓

I’m going out on a limb here and thinking the U.S. dollar may need to take a breather here for a moment. I’m going to review a few charts to explain my reasoning…

First up is the slight divergence I’m seeing in the Ultimate Osc., which is a momentum indicator that takes into account three different time frames. It’s a small divergence and I’d prefer to see the Ultimate Oscillator break down further for me to get more confident in this opinion, but a divergence nonetheless.

I’ve discussed COT data before, and below is a chart showing the net positions in the euro. As you can see, commercial traders (green line) have never been more net-long the euro since 2007. While ‘small traders’ (blue line) have never been more net-short during the same time period. Typically the commercials win this tug-of-war, but the time it takes to declare a winner is the key variable.

Finally, the EUR/USD pair has fallen hard and fast and now sits just above the 78.6% Fibonacci retracement level.

With all that being said, and the constant chatter that comes out of the Europe as they try to solve the woes of Greece, a lot could still impact the dollar. Bernanke’s quantitative easing programs have not supported a strong dollar, and if we get an additional round this summer (which is anyone’s guess) then we could see history repeat itself with a contraction in the dollar. Long-term I think parity for the EUR/USD is not out of the question but few things that important happen in a straight line.