The most overcrowded trade in the world could be about to unravel.
The crash in the euro currency, the crisis in Greece, and rumours of a rise in interest rates has caused the US Dollar to explode rapidly higher in the past 8 months.
This has created another problem…
Trader “sentiment” has now pushed too far to the extreme: traders are extremely bullish on the Dollar and extremely bearish on the Euro.
That is why last Friday I warned our subscribers to be very careful…
When everybody is expecting the same outcome, usually the exact opposite happens.
And on Friday, our fears became true…
On Friday’s I showed this chart of how “commercial hedgers” – in other words the big money institutions – are betting on the US Dollar:
The smart money are usually on the correct side of the market, specially when they are holding extreme positions on a market.
As you can see from the chart, commercial hedgers (or the smart money) are holding extremely negative positions against the US Dollar.
This bearishness on the Dollar is positive for the euro – hinting that we should NOT bet against the euro currency in the short term.
On Friday afternoon, our caution was rewarded…
Look at what happened to the Euro currency on Friday, a few hours after the it broke the supporting trendline (red line):
This is a classic example of a “false breakout”: the euro broke down below support, only for it to quickly reverse direction and go back above it again.
Traders who were betting against the euro got hosed!
Fortunately we avoided this disastrous trade since we knew the smart money were betting in the opposite direction.
So where next for the Dollar and the Euro? Take a look at this chart:
The US Dollar is stuck in a “wedge” pattern. Either it will break to the upside or the downside of this wedge.
We need to wait and see which direction the Dollar will break before we can initiate any new positions on it and the euro currency (which is the inverse of the Dollar).
If commercial hedgers are correct, then we should expect the Dollar to pull back to support near 92. This is a level we will establish aggressively long positions on the Dollar (and short positions on the euro).
We still expect that in the long term the euro will fall to parity with the US Dollar.
Of course, the dollar could break higher in the direction of the major trend. However, the statistics and trader sentiment shows that any upside potential is very limited.