When looking for trading setups, we have found it pays to ascertain longer term trends and activity, then work your way in to target specific setups.
Since early September, the Greenback has been on a tear, while all other currencies have been pressed lower, including Gold and Silver. What has been interesting has been that a number of commodities have performed strongly while the DX has strengthened.
The entire Energy Complex has moved higher, we see softs bottoming with Sugar, & Cocoa grinding higher, while Coffee begins to put in a bottom. Beans have had a little run, while Wheat and Corn are trying to put in a bottom as well. When the Dollar does peak and reverse lower, this will provide a tailwind which will benefit commodities in general in what we anticipate will be a 2018 that sees a rise in inflationary assets.
So we are ever vigilant with trying to catch this turn, and this weekend we had signals triggering that raised our eye.
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This is a snapshot of Alchymist's Trend & Reversal Signals Report. we can see that in the weekly section there is a Reversal Down in the DX, with corresponding reversal up's in the EUR/YEN + AUD. It appears after 2 months, the USD is finally running out of gas.
We posited last week that Trump would be pressuring China & Japan on his Asia tour, not only for Trade imbalances, but currency manipulation as well. The US needs a weaker Dollar, and you can bet Trump will make that happen.
So we have weekly reversal signals triggering across currencies. Next lets look at the COT reports (from 10/31 as Nov 7 will be released eod tomm)
The first thing that we notice is that we have extremes in positioning by both Commercials and Funds, and the fact that this exists after 2 months of sharply correcting prices is interesting indeed. It tells us participants are still committed to their directional bets, as opposed to the Ebb and Flow we tend to see from Extreme to Neutral positioning as players lock in profits when prices correct from the preceding trend.
This tells us energy is building up, and the volatility we have witnessed in Currencies this year will be continuing into 2018.
Next, we can see that Hedge Funds are extremely Short the DX + Yen, while being heavily long the Eur and the Commodity Currencies. Historical performance tells us a interesting tale given current positioning.
1 When Hedge Funds are short DX with 18m Relative Strength Scores of <10 on our proprietary scale, we see Price Distribution in the 80th + 70th Percentile shift significantly from 1:1 odds to now 1: 1.85 in Bears favor. Hedge Funds have been the clear victor when short the USD.
2) When Hedge Funds are Long Euros with 18m Relative Strength Scores of >90 on our scoring scale, we see Price Distribution in the 80th + 70th Percentile shift significantly from 1.15:1 odds in Bulls favor, to now 1.85:1 in Bulls favor. Hedge Funds have been the clear victor when Extremely Long the Eur.
3) However, the Yen tells a different story. When funds score < 5 on 18m Net Position, odds move from 1.06:1 to 1.29:1 in bulls favor. Not as clear outperformance as witnessed in the DX+EUR, but in this case Commercial Traders have the edge here.
Lets look at the Weekly Price Charts now.
First the Yen:
A - We can see that around 87.30, there is a significant Horizontal Resistance/Support Level going back 3 years. - We are now holding, and bouncing slightly off that support again.
B - Look at the last 3 weeks candles - All are reversal type candles, like Doji and spinning tops - When this occurs after a beat-down like we just witnessed (Over 6 points/almost 7% drawdown in 10weeks is a massive move for a currency) this signals indecision. Indecision precedes reversals.
C - Our Weekly Oscillators is in Buy range now.
A - The past 2 weeks we see a Gravestone Doji followed by a Hammer candle - Both are reversal candles.
B - Weekly Oscillator is now in buy range.
The DX chart is simply a inverse of the EUR with a Hanging Man Candle followed by bearish downweek, confirming the change in direction.
Currencies have seen sharp moves over the past 2 months, and we are seeing Reversal Signals across all of their charts. Adding significant fuel to the fire are the extremes in Commercial and Fund positioning that will add to volatility once these extremes begin to unwind.
Statistical analysis shows us that the Eur + Yen are set to outperform, while DX is due for much weaker price distributions in the coming 5 weeks.
As Trends have not yet reversed, you must be patient with your betting. Wait for your preferred short term trend indicators to go Green, then place your bet.
Our preferred place betting strategy is to enter Eur+Yen Longs with at the money puts going out 60-90 days. This will cost you 1 - 1.5 cents for protection. Once prices reverse and begin to rally 1-2 cents, you can sell a covered call another 2 cents out of the money to reduce the price of your insurance.
The R/R profile will be at least 3-1, and you'll have 60-90 days for the inevitable reversal to commence.
Further to this, Commodity bulls may finally get their time in the sun with Metals, Grains, Softs, and Energy all rallying into Q2 next year as this next wave down in the dollar unfolds.