Get Ready for a Euro Rally. Or Don’t … and I’ll Get Ready for You

The US dollar has had a torrid rally. But my charts suggest a correction is due.

Maybe that is what this latest bout of currency-market volatility is telling us.

Volatility is often a precursor to a change in trend (in all time frames). We know dollar sentiment is overwhelmingly bullish – it seems a one-way bet right now. But Mr. Market is watching because he loves one-way bets.

I’m not betting big on a correction right at the moment. But I have told my subscribers to get ready. Today’s price action plus sentiment data suggest a speculative extreme may be near.

I watch open interest levels in the currency futures market. It is a good longer-term measure of sentiment. Often times, open interest reaches an extreme just ahead of a trend change. Below is a currency futures chart for the euro. The open interest level is huge and sentiment for the euro is extremely bearish:

The red circles denote peaks in open interest that corresponded with key lows in the price of the euro. Given the extreme levels, I think euro bears should be very careful.

I am monitoring the major pairs closely. Because if a correction lower in the dollar does materialize at these levels, it would likely be at a least multi-day, and probably a multi-week, event — in other words, something playable.

Analysis like this is one way I keep my subscribers prepared. Until recently, it’s been up to them to follow along and follow through.

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Thank you. And be careful out there.

  • ForExchange

    Hi Jack,

    the COT report is on your side. It suggests that EURUSD can fall a couple of hundred pips but that would be it. After that we arrive to a sentiment extreme.

    Good luck,
    FE