The USD is stuck in a bearish setup

What looks to be back to back weekly
bullish reversals in the euro has set up the possibility of a sharp decline in
USD over the coming weeks,
contrary to our initial expectations.
However, as readers know, we have prepared for this via long AUDUSD positions
established months ago and added to back in June near the 0.73 lows. AUD has
since greatly outperformed the EURUSD by about 2% this month.

As such, our long USDCHF is in jeopardy of getting stopped out
next week on a decline below 1.23 and we think that the chart pattern suggests a
move down to 1.18/1.17 is in order. But with that said, the extreme long
position in EURUSD forces us to be cautious on this pair, meaning that we
continue to favor long AUDUSD as the sound alternative to long EURUSD.

USDCAD recoiled from resistance at the 1.15 level, and only a
move above here would spark a quick rally to 1.17/1.21. Meanwhile, the pullback
to 1.13 still looks bullish near term.

USDMEX is correcting higher but in a bearish fashion, meaning
we may see a quick drop to 10.80. However we still would rather see a rally back
to 11.09 where we would look to go short again. More shorts should be placed
around 11.17. This is a long term trade as we think MEX has reached all time
lows and will rally signficantly over the coming years in line with other
emerging market FX.

There is no change in our view on the dollar index. 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. USDX remains tied to the fate of the
euro. With the rally back above weekly trendline support at 1.27 the dollar is
now setting up bearishly for the near term. A break below 85 would confirm a
near term bearish scenario.

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: Stocks have spent the last year trading within a few
percent of the key 1,250 line. The market this level keeping the near term
bearish picture in limbo. A move above downtrend resistance at 1280 would be
near term bullish.

But as we have said time and again, “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: Bond prices have effectively pushed through channel
resistance crossing at 105.50, just as we forecasted and 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 tested trendline resistance
and has since rallied. 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

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.

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
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department, After four
years as a senior currency strategist he went on to found – a research firm catering to professional traders.