Everything remains hitched to EURUSD
Once again the dollar is up as
investors “rethink” the Fed’s stance. This year has been tough for
our bullish dollar call, primarily because each time the dollar swoons on
speculation that the Fed is done raising rates, we point out that there is
probably one more to come, and that historically, it has been bullish not
bearish.
When you account for the fact that the trade deficit is in SE
Asia and that the European markets are as fractured as ever, the record or near
record long positioning in the euro is really because the hedge funds have no
where else to go.
This morning the euro slipped below weekly trendline support,
putting it in a sligthly bearish position. Meanwhile, our “hedged” positions are
doing nicely together as USDCAD has rallied and our synthetic AUDCHF position
continues to climb since we added to this back in June. Finally, USDMEX is
rebounding and should see a rally back to 11.09 where we would look to go short
again.
Last week we said the large bearish weekly reversal was a bad
sign for dollar bulls but three consecutive weeks of higher highs in USDCAD has
us cautiously optimistic. The reason being that normally USDCAD will act as a
leader, making a move a few weeks before the other majors. With oil prices well
priced into the bullish outlook for CAD a correction in this commodity currency
should allow USDCAD to rally to 1.17/1.21. We are long from 1.1330.
For USDX, everything remains hitched to EURUSD, its biggest
component. While a pull back to trendline resistance turned support at 85.50 saw
a bounce back to 86, only a move below last week’s lows at 1.2470 in EURUSD,
which marks the 38.2% Fib retracement of the November lows to June highs opens
the way for a test of the 50% retracement and former highs at 1.2310. Otherwise,
the large bullish reversal in EURUSD could lead to another test of the key 1.30
area if EURUSD maintains above weekly trendline support now crossing at 1.2650.
Gold: No change:Gold we belive may be in “wave C” following a
strong “wave B” bounce that rallied off of our support zone at $540/$580. Recall
that while wave C down may be underway, we view this as another opportunity to
position long (similar to our view when “wave A” ended). This is because we
expect the correction from $730 to end the larger “wave II” pullback followed by
a soaring “wave III” rally.
As we have said for months now, “In the broader picture, this long awaited
correction is underway and recall that a top here at $720 will mark the end of
“wave 1 of V” meaning a pullback to $580/540 would be “wave 2 of V” followed by
an explosive rally in “wave 3 of V” to new all time highs.”
Stocks: No change: Stocks have spent the last year trading
within a few percent of the key 1,250 line. The market fell back to this level
today keeping the near term bearish picture in limbo.
As we said yesterday, The market is extremely optimistic that a peak in the Fed
cycle will see a lower dollar and higher stocks. Unfortunately, history says the
exact opposite.
A move above downtrend resistance around 1,280 might encite the bulls so we
think traders who went short from the 1,280/1290 area last week should tighten
up stops to the 1290 level and wait to go short again if this area holds back
the bulls. Add to this upon a sustained move below 1,245, but we do not favor
going long the US stock market.
Bonds: No change: Bond prices are breaking out through channel
resistance crossing at 105.50 which would suggest that a larger rebound is
underway. We continue to see a rally to 107/109 followed by a renewed delcine
below 104. The reason is that 104 will be a tough nut to crack the first time
around and the majority of players are already extremely bearish on bonds.
Crude Oil: No change: Crude oil reached our minimum upside
target at $78/$80 last week thereby fulfilling the “wave V” rally we said to
expect back in February. The 23% advance has made some subscribers very happy
and we commend you for jumping into this market as you well knew that hedge
funds were short back at $60.
The pullback from our technical target at $78/$80 is now testing trendline
resistance. But with tensions in the Mid-east our target may not mark the top.
The reason we say this is that Crude on a weekly chart looks like it may go
“parabolic.” While impossible to pick when a commodity will extend like this
spec positioning allows for hedge funds and hedgers alike to buy buy buy.
As we said three months ago, “While not expected, an “extended fifth” wave would
mean that this is just the first leg up within a larger move. That seems
unlikely, but the implications are that either we could top out at $78 or
possibly at $82. A prudent move would be to take some profits there and wait for
a pullback to add back to longs in the hopes of higher highs in the $82-$92
range.”
Therefore, traders were encouraged to take initial profits at the $78/$82 range
last week and to now either tighten up remaining stops or buy back in here at
trendline support. If we do get a spike, a move to $90/$100 would be were we
look to cover and possibly reverse.
Recommended long at $55 last November. Still looking for a
move to $80-$100 over the coming months.
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.