I pay a lot of attention to inter-market relationships because what happens in one market often has an impact upon other markets. In my last several blogs I’ve written about a Key Turn Date (KTD) around the beginning of September when a number of major market trends reversed…most notably the principle US stock indices and the US Dollar Index…but also key commodity markets and indices.
When a number of markets all change direction on or around the same date I think that makes the “turn” all the more significant.
Since the KTD I’ve been trading on anticipation that we may have seen an important trend change in the US Dollar and the US stock market.
The US Dollar Index is heavily weighted to the Euro currency. The EURUSD currency pair is by far and away the highest volume currency market and it definitely influences other FX cross rates. For instance, if the Euro is strong against the USD then most other currencies are probably also rising against the USD.
In April currency speculators in the futures market were the most net short the Euro they had been in 4 years...by August they were the most net long they had EVER been. The size of the swing from their April bearish positioning to their August bullish positioning was the largest ever. Speculators have pared their bullish positioning a bit over the last few weeks but they are still HUGELY net long by historical measures.
The Euro rallied ~10% from ~1.08 in April to ~1.20 on the September KTD and has backed off to ~1.17 since then. I think we may have seen an important change in trend on the KTD. (The head and shoulders topping pattern would project a break to ~1.15.)
What caused the huge rally in the Euro (and other currencies) against the USD? Was it a perception of a strengthening Euro or a weakening USD…or a little of both? I’d say a little of both…with massive “dollar printing” in the USA, narrowing interest rate spreads, the “possibility” of a common Euro Area fiscal policy sparked by the Merkel/Macron “reconstruction bond” plan…etc…BUT…my experience of trading currencies for over 40 years is that the FX market is very sentiment/momentum driven and often goes WAY too far in one direction and then turns on a dime and goes the other way. Look at historical charts and you will see lots of “V” shaped tops and bottoms across different currency pairs.
I’m currently short the EUR and the CAD against the USD. Both currencies made a high on the KTD and a 2nd lower high this week. (A double top with the right shoulder lower than the left is one of my favorite chart patterns.) The 77 cent level has also kept a “lid” on the CAD for nearly 2 years.
My anticipation is that selling in these markets will accelerate “IF” they markets drop below their September lows (that HUGE net long position in the Euro will need to be unwound…if the Euro tumbles it will probably take CAD and other currencies lower.) If I’m wrong about that and the markets rally I’ll be stopped out for a small losses.
I got short US stock indices Tuesday for somewhat the same reasons I’m short the EUR and CAD. (I’ve been waiting for the right moment to get short stock indices for more than 2 weeks.) Stock indices made an important high on the KTD and a lower high Monday of this week (Monday could have been a “blow off” high…given the massive buying of very short dated calls.)
I’m thinking this week’s high in the stock indices may be the “lower shoulder” of a double top. This set up gives me a good risk/reward ratio if indeed the equity indices start to fall from here…especially if they fall below their September lows.
This has been my first post to this site. I’ve had a steep learning curve (no kidding!) with all the new software but I look forward to posting a lot more content soon. Please stay tuned.