Tag Archives: forex

Watch This Breakout In The U.S. Dollar

After going sideways for five months, the U.S. has recently resumed its rally that started in the spring. On Monday, the U.S. Dollar Index broke above its key 97 resistance level that formed at the index’s peak in August. If the index manages to stay above this level, it may signal even more strength ahead. The dollar is strengthening because U.S. interest rates have been rising for the past couple years, which makes the U.S. currency more attractive relative to foreign currencies.

Dollar Daily

The weekly U.S. Dollar Index charts shows the key longer-term levels and price targets to watch. If today’s breakout above 97 holds, the next price target to watch is the 100 resistance level that has acted as a key support and resistance level for the past four years.

Dollar Weekly

Even if you do not trade currencies, the U.S. Dollar Index is very important to watch due to its significant influence on other markets, particularly commodities and emerging market equities. Bullish moves in the U.S. dollar are typically bearish for commodities (including energy and metals) and emerging markets, and vice versa. If the U.S. Dollar Index continues to rise after today’s breakout, it would spell even more pain for commodities and EMs. Further, approximately 40% of S&P 500 earnings come from abroad. Needless to say be on the lookout for earnings estimate downgrades over the coming months.

Key Levels To Watch In The Dollar And Euro – RIA Pro

Since April, the surging U.S. dollar has caught the majority of economists and market participants off-guard and contributed to the bearish action in emerging markets and commodities. The dollar is climbing due to rising U.S. interest rates and the tightening of U.S. monetary policy as well as the rout in emerging markets that has created a “flight to safety” bid for the currency. If the dollar extends its gains, it will spell even more pain for emerging markets and commodities, which will spill over into developed markets as well. In this piece, I will analyze the charts of the U.S. Dollar Index and the euro to help determine where they are heading next.

After forming an ascending triangle pattern in June and July, U.S. Dollar Index experienced a bullish breakout last week as the Turkey drama unfolded. This breakout is a bullish sign as long as the index remains above the key 95 support level that marked the top of the ascending triangle and the peak in October and November 2017.

Daily Dollar Chart

The longer-term U.S. Dollar Index chart shows how the currency broke out of a bearish channel pattern in April and recently broke above the key support and resistance level at 95. The next price targets and resistance levels to keep an eye on are 100 and 104. If the recent bullish breakout remains intact, those resistance levels are likely to act like a magnet for the Dollar Index due to their psychological importance. If the index is eventually able to break decisively above 104, it may foreshadow even more powerful gains ahead.

Dollar Weekly Chart

The euro, which trades inversely with the U.S. Dollar Index, broke down from a descending triangle pattern, which likely means that further weakness is ahead if it stays below the 1.1600 resistance level that marked the bottom of the triangle and the lows in October and November.

Euro Daily Chart

The longer-term euro chart shows how the currency broke below a bullish channel in April and fell beneath the key support zone around 1.1500 to 1.1600. If the euro stays below this level, it may attempt to gun for its next support level and price target at 1.0500, which marked the lows from 2015 to 2017.

Euro Weekly ChartFor now, the U.S. dollar and euro remain in a confirmed uptrend and downtrend respectively. It is extremely important to watch the U.S. dollar right now because it is one of the major influences on emerging markets and commodities. As developed nation central banks tighten their monetary policies, the unwinding of the stimulus-driven emerging markets boom of the past decade is likely to send the U.S. dollar much higher.

The “Smart Money” Is Bullish On The Dollar

After a brief post-Presidential election surge in 2016, the U.S. dollar has been in a steady downtrend since early-2017. The dollar’s grind lower has helped to boost non-U.S. currencies as well as commodities prices, which trade inversely with the dollar. Now that the “short-dollar, long everything else” trade has been going on for so long, it has become extremely crowded: the consensus view is that this trade will continue for much longer and even accelerate. On the other hand, the “smart money” are betting heavily on a reversal of this trade, as I will show in this piece.

For the past several months, the U.S. Dollar Index formed a triangle consolidation pattern as it digested the financial market volatility. The index broke out of this triangle pattern today, which is a bullish sign as long as the breakout remains intact (ie., the index remains above the top of the triangle pattern).

USD Daily

The longer-term chart shows how the “smart money” or commercial hedgers (see the green line under chart) have built up a bullish position in the U.S. Dollar Index futures. The last several times the hedgers built similar positions, the Dollar Index has rallied. The dollar’s downtrend since early-2017 has occurred within a channel pattern, and the triangle pattern discussed in the prior chart can be seen within this channel. The Dollar Index needs to break out of both the triangle pattern and the channel pattern in a convincing manner in order to signal the end of the downtrend.USD Weekly

The euro, which trades inversely with the U.S. dollar, formed a similar triangle pattern over the past several months and has broken down from this pattern today. This breakdown is a bearish sign for the euro and a bullish sign for the dollar as long as the euro’s breakdown remains intact (ie., it doesn’t reverse and break back into the triangle pattern).

Euro Daily

The “smart money” or commercial euro futures hedgers have built their largest bearish position in at least a half-decade, which increases the probability of a bearish-euro/bullish-dollar move in the not-too-distant future. The commercial euro futures hedgers have a short position of nearly 200,000 net futures contracts, which is far larger than their relatively bearish position in 2013 and 2014 before the euro weakened sharply against the dollar.

Euro Weekly

The “smart money” or commercial futures hedgers are also bearish on the Japanese yen, which would also be bullish for the dollar if they are proven right. The yen experienced bearish moves the last couple times the commercial hedgers positioned similar to how they are positioned now.Yen Weekly

The “smart money” are currently bearish on the British pound as well and have a strong track record of positioning bearishly ahead of major pound routs over the past half-decade.Pound Weekly

If another wave of dollar strength occurs, it would be very bad news for crude oil and the overall energy sector (crude oil and the dollar trade inversely). The U.S. dollar’s surge in 2014 and 2015 was the trigger for the violent crude oil bust. Even more concerning is the fact that the “smart money” are more bearish on crude oil now than they were immediately before the 2014 oil bust, as I discussed in greater detail last week. While oil’s short-term trend is still up for now and I believe in respecting the trend, there is a very real risk that another violent liquidation sell-off may occur when the trend changes.

WTI Crude Monthly

For now, I believe everyone should keep an eye on the U.S. Dollar Index to see if today’s triangle breakout has legs and if the index can break out of its longer-term channel pattern. While most market participants currently believe that further bearish dollar/bullish commodities action is practically guaranteed, they need to be aware of the tendency for the market to “tip over when everyone gets to one side of the boat.”

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Here’s What To Watch In Crude Oil Right Now

After experiencing weakness in February and March, crude oil spiked to three-year highs in April due to geopolitical fears associated with the Syria bombing campaign as well as falling inventories. Earlier today, President Trump tweeted that OPEC was to blame for “artificially Very High!” crude oil prices, which he said are “No good and will not be accepted!” In this piece, we will look at key technical levels and other information relevant for understanding crude oil prices.

Since the summer of 2017, crude oil has been climbing a series of uptrend lines, but broke below one of these lines during the market rout of early-February 2018. WTI crude oil broke above its $66-$67 resistance last week, which is a bullish technical signal if it can be sustained. If WTI crude oil breaks back below this level, however, it would be a bearish sign.WTI Crude Daily

A major reason for skepticism about crude oil’s recent rally is the fact that the “smart money” or commercial futures hedgers currently have their largest short position ever – even larger than before the 2014/2015 crude oil crash. The “smart money” tend to be right at major market turning points. At the same time, the “dumb money” or large, trend-following traders are the most bullish they’ve ever been. There is a very good chance that, when the trend finally changes, there is going to be a violent liquidation sell-off.

WTI Crude Monthly

Similar to WTI crude oil, Brent crude has been climbing a couple uptrend lines as well. The recent breakout over $71 is a bullish sign, but only if it can be sustained; if Brent breaks back below this level, it would give a bearish confirmation signal.

Brent Crude Daily

It is worth watching the U.S. Dollar Index to gain insight into crude oil’s trends (the dollar and crude oil trade inversely). The dollar’s bearish action of the past year is one of the main reasons for the rally in crude oil. The dollar has been falling within a channel pattern and has recently formed a triangle pattern. If the dollar can break out of the channel and triangle pattern to the upside, it would give a bullish confirmation signal for the dollar and a bearish signal for crude oil (or vice versa). The “smart money” or commercial futures hedgers are currently bullish on the dollar; the last several times they’ve positioned in a similar manner, the dollar rallied.

USD Weekly

The euro, which trades inversely with the dollar and is positively correlated with crude oil, is also worth watching to gain insight into crude oil’s likely moves. The “smart money” are quite bearish on the euro, which increases the probability of a pullback in the not-too-distant future. The euro has been rising in a channel pattern and has recently formed a triangle pattern. If the euro breaks down from this channel, it would give a bearish confirmation signal, and would likely put pressure on crude oil (or vice versa).Euro Weekly

There has been a good amount of buzz about falling inventories and the reduction of the oil glut, but this week’s inventories report of 427.6 million barrels is still above average for the past 5 to 10 years. In addition, U.S. oil production continues to surge and recently hit an all-time high of 10.5 million barrels per daily.

For now, the short-term trend in crude oil is up, but traders should keep an eye on the $66-$67 support zone in WTI crude oil and the $71 support in Brent crude oil. If those levels are broken to the downside, then the recent bullish breakout will have proven to be a false breakout. Traders should also keep an eye on which way the U.S. dollar and euro break out from their triangle and channel patterns.

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Crude Oil Breaks Out, But Will It Last?

For the past several weeks, I’ve been watching triangle patterns form in crude oil after its slide in early-February. Breakouts from triangle patterns often lead to important directional moves, which is why I believe it is worthwhile to pay attention to these formations. Both WTI and Brent crude oil finally broke out of their triangle patterns today due to Middle East tensions and speculation regarding more cuts in Venezuelan output.

Here’s West Texas Intermediate crude oil’s breakout:

WTI Crude Daily

Here’s Brent crude oil’s breakout:

Brent Crude DailyWhile I believe in respecting price trends instead of fighting them, I’m still concerned about the fact that crude oil’s rally of the past two years has been driven by “dumb money” or large speculators, who are more aggressively positioned than they were in the spring of 2014 before the oil crash. At the same time, the “smart money” or commercial hedgers have built their largest short position in history.

WTI Crude Monthly

Last week, I showed that U.S. Treasuries had broken out of triangle patterns of their own. Crude oil’s recent bullish move has been threatening the Treasury breakout (the two markets trade inversely):

30 Year Bond

10 Year Note

The U.S. Dollar Index is worth paying attention to when analyzing the crude oil market. Bullish moves in the dollar are typically bearish for crude oil and other commodities, and vice versa. Today’s bullish crude oil move and breakout is not confirmed by the U.S. Dollar Index, which is up .64 percent today. The U.S. Dollar Index has been trading in a directionless manner for the past two months, but its next major trend is likely to affect crude oil. If the Dollar Index can break above its trading range and downtrend line, it would likely lead to further bullish action (which would hurt crude oil). If the Dollar Index breaks down from its trading range, however, it would likely lead to further bearish action (which would push crude oil higher).

Dollar Daily

The longer-term U.S. Dollar Index chart shows that it is trading in a downward-sloping channel pattern. The dollar will remain in a downtrend as long as it trades within this channel. A breakout from this channel would increase the probability of a rebound, which would hurt crude oil. As I’ve been showing, the “smart money” or commercial hedgers are bullish, while the dumb money are bearish.

Dollar Weekly

This is an admittedly confusing time in the financial markets: correlations are breaking down, many technical breakouts and breakdowns are failing and whip-sawing, and the market is chopping all over the place. For these reasons, I’m not making any short-term market predictions, but just showing key charts that I believe are worth paying attention to. Yes, I believe they must be taken with a healthy grain of salt. I am suspicious of today’s crude oil breakout because it’s not confirmed by the U.S. dollar and because of the large bearish position held by the “smart money.” The smart money are usually right in the end, but it’s not prudent to fight the trend in the short-term. As usual, I will keep everyone posted regarding the recent crude oil and Treasury bond breakouts.

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