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The positive sentiment towards the dollar reached dangerous extremes last week. We closely follow the Daily Sentiment Index (DSI) which is a daily survey of small futures traders conducted by Trade Futures. We find it is very useful as a contrarian indicator as it often signals when sentiment towards a market is becoming too lopsided. It does so by measuring the bullishness towards a particular market in percentage terms. Historically when an instrument reaches the low single digits (or over 90) it is very prone to a reversal. Last week the DSI in the Euro, Pound and Gold all fell below 10%. For this reason the counter-trend reaction that materialized this week was not all that surprising. In our view this occurrence was actually quite healthy as it has served to cleanse the market of stale USD long positions. The broader technical outlook remains quite positive on the Greenback, however, and we want to use this counter-trend reaction to align ourselves with the broader USD uptrend. Near-term cycle studies suggest some further currency strength could be seen over the next couple of days, but we suspect Thursday’s high will probably hold - at least in EURUSD. We like getting short the Euro around the middle of the week.
EUR/USD Daily Chart: July 12, 2013
Charts Created using Marketscope – Prepared by Kristian Kerr
Key Event Risk Next Week:
Source: DailyFX Calendar
LEVELS TO WATCH
Resistance: 1.3165 (Fibonacci), 1.3205 (Gann)
Support: 1.3010 (Gann), 1.2950 (Gann)
STRATEGY – After Tuesday look to sell EUR/USD
Stop: 1-day close above 1.3205
Target 1: 1.2900
Target 2: 1.2790
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
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