Does dollar rally need a break?

The U.S. dollar has been gaining strength since early May of this year, when a major price reversal was put in place. So far, the currency has mainly rallied against the euro but the index itself is pushing against significant resistance levels.

Chart 1: Determined rally from the USD has pushed it into resistance

 

 Source: BarChart (edited by Short Side of Long)

 

The U.S. dollar Index has started another leg of its bull market and this strength will continue. However, that does not mean one should run out and sell euros or buy dollars like a blind bat. The trade has become recognized and whenever speculators catch onto a trend, they tend to pile on. As we can see in Chart 1, the USD Index has reached a short term resistance zone. There is a high probability USD will pause and pull back from this level. At the same time, the euro has become technically oversold on a short-term perspective, as it trades more than 2 standard deviations away from the 50 day mean. It has also reached one of its recent support zones, where buyers should be present. Therefore, a relief rally could follow (see chart 2).

Chart 2: European Euro has now become oversold over the short term

 

Source: Stock Charts (edited by Short Side of Long)

 

As a matter of full disclosure, I held a long position in the Japanese yen on the FXY ETF around $96, which is equivalent to about 101 on the currency pair (see Chart 3 below). With the triangle compressing in the last few weeks, I tightened my stop loss, which was finally trigged at 101.85 on Thursday (Asian time) for a minuscule loss. I went long USD/JPY at just below 102 on a recent technical breakout.

In other words, I am now short the yen, which is an overcrowded trade. A tight stop is necessary to keep risks down, because I never like being on the same side of the boat as majority of the other traders.

Chart 3: US Dollar has recently broken out against the Japanese Yen!

Source: Stock Charts (edited by Short Side of Long)

 

About the Author
Tiho Brkan

Tiho Brkan is a professional trader and editor of the  trading centered blog: "The Short Side of Long." 

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