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The US dollar index staged a major bounce back above the 93.00 level last week, as traders moved back into the safety of the greenback amidst concerns over China and an increase in tapering expectations.
One of the most interesting things behind the current move higher is the huge sentiment bias that building amongst retail investors. The sentiment bias is way too one-sided and is starting to raise some big red flags.
The ActivTrader market sentiment tool is showing that some 95 percent of traders are bullish towards the US dollar index, which is a staggering large one-way sentiment skew amongst the retail traders.
Typically, one-way bearish sentiments skews are warning us that this ongoing trade could reverse at anyime. I think the current sentiment metric could mean that the buck could reverse at any time.
We should also consider the notion that major market tops can form when we see these type of huge sentiment extremes. Again, this is a potential red flag that a major market top may be forming in the US dollar index.
The technical are equally as interesting, and really highlight and draw attention to the fact that the US dollar index could be about to breakout to upside or sink at any time. I think with the FOMC meeting approach it will likely be a make-or-break week for the greenback.
Much will also depend on the fundamental backdrop. Not only is the FED meeting this week, but we also have the debt ceiling to consider and the People’s Bank of China.
The Chinese central bank policy meeting could be huge, as it comes amidst a potentially market impacting risk event from Evergrande the massive Chinese property developer that is about default on its $3000 billion debt obligations.
US Dollar Index short-term Technical Analysis
Looking at the four-hour time frame, an inverted large head and shoulders pattern has broken to the upside after many up and down move and appears to be in the process of hitting its measured target.
The 93.50 area is the final destination of the pattern, however, do be aware that a much large, inverted head and shoulders pattern may be in the process of forming which could boost the bucks short-term prospects.
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US Dollar Index Medium-term Technical Analysis
According to the daily time frame a large head shoulders pattern could be forming in the background, and the pattern is just going through the formalities before the next big drop.
Please also be aware that a huge head and shoulders pattern got invalidated on the daily time frame, so these typically bearish pattern do have a nasty habit of being invalidated in the current market conditions which could propel the US dollar index much higher.
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