Is a Dollar Collapse Nigh?Oct 26, 2012
Chad Karnes, CMT
Dollar Sentiment is as low as it has been over the last few years. This is a contrarian buy signal and a great trade setup.
On 2/15/05 Alan Greenspan made a statement that at the time flew under the radar and didn’t capture the public’s attention like it probably would if Ben Bernanke made such a statement today. Greenspan said to the Senate Banking Committee concerning Social Security, “We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power”. Given statements such as these and the recent Fed actions of QE-forever, why then am I bullish on the US Dollar?
In our October ETF Profit Strategy Newsletter published 9/21, I laid out a case for why the US Dollar is a good short-term buy. That trade has worked out well thus far as the trade-weighted US Dollar has risen over the last month from its low on 9/14 around $78.50 to around $79.91 on 10/25.
What Everyone Else Thinks
One of the reasons I am bullish on the dollar is because everyone else is indeed bearish. The short dollar trade is the popular trade, and when trades get popular they also usually get crowded with little “oomph” to propel them further.
The Fed's easy money policies is a major part of the bearishness toward the dollar. This can also be seen from some recent headlines that support a bearish dollar and bullish Euro (NYSEARCA:FXE), Pound, and Yuan:
“Dollar Off, Sterling (NYSEARCA:FXB) Jumps as UK sees Growth” – Marketwatch - 10/25/12
“China Yuan Hits Record High on Recovering Confidence” - WSJ 10/25/12
“Financial WMDs Debase Dollar, Risk Inflation (NYSEARCA:TIPS)”- Marketwatch 10/25/12
Every day there are news articles trying to justify the daily swings of the markets, currencies (NYSEARCA:FXY) included. Do these headlines and articles really help us make profitable decisions?
The Contrarian Opinion Matters
There are numerous opinion surveys that reflect the public and investor sentiment on the Dollar and many other currencies and assets. Bloomberg, Ned Davis, and Market Vane are a few of these.
When public opinion in these surveys reaches extremes, a turning point in the asset is usually very near. Counter-intuitively when opinion hits its most bullish is usually when tops occur and when sentiment is most negative is usually when bottoms occur.
In September negative sentiment in the US dollar hit a level that had not been seen except a few times in the past; coincidentally when the dollar was forming a bottom. As long as negative sentiment continues, I expect the dollar to rise, not fall.
Knowing which way the dollar is headed has much larger implications than what appears on the surface due to its highly correlated nature with other assets, especially the stock markets (NYSEARCA:IWM). Given the size of the Dollar market, it is the proverbial gorilla in the room. In the article found here I discuss the dollar’s importance in the macro environment in more detail.
The Chart that Matters
Technically the dollar has formed a bottom at September’s lows and shown in the chart below. This support held again in early October and as long as sentiment stays extreme should keep providing the buyers needed to propel the dollar higher. The September low also occurred in a longer term typical Fibonacci correction level between 38.2 and 50% giving another reason to look for a trend change.
In our October Newsletter on 9/21, we advised the purchase of dollar ETFs such as the PowerShares DB US Dollar Index (NYSEARCA:UUP) and the PowerShares 3x levered equivalent (NYSEARCA:UUPT). Both of these trades are up and still offer opportunity. We also identified price targets as well as stop locations. While the rest of the world is blue on the dollar, we've capitalized on the short-term opportunity.
The ETF Profit Strategy Newsletter monitors global events and formulates profit strategies based on fundamental, technical, and sentiment research. High probability trades such as the one on the dollar is what we look for in trading opportunities.
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