ForexSpirit

In my last couple of journal entries I’ve mentioned that a dollar rebound could be on the cards.

One of the reasons I had been thinking along these lines is that the euro hasn’t been too convincing up till now at really testing the all-time high near 1.3665 (although it came within a whisker earlier today).

Another reason has been that the euro open interest is also pretty large. According to an article on Bloomberg on Monday: “The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop rose to 106,770 as of April 17, replacing the previous high of 104,394 a week earlier, the Washington-based Commodity Futures Trading Commission reported on April 20.”

This means that the smart money sees things going up still, but it pays to be slightly cautious when open interest reaches new heights as it can also mean that the market might be running out of buyers. If there are no buyers then price has nowhere to go but down.

On the flip side, it is also useful to know what the dumb money is doing. To figure this out you need to have access to what retail traders are up to. FXCM, in their kindness, provide such information via their SSI indicator. What is interesting here is that a recent article detailing the SSI indicator’s output from April 19th has most retail traders positioned short.

So the smart money is long and the dumb money is short. What this tells me is that any short term dips (either caused by profit taking or economic data releases) are going to be bought up by the smart money.

Until the dumb money jumps on to the long bandwagon we are probably not going to see a huge dip in EUR-USD. When everyone is long the smart money will abruptly shift sides, thus profiting from what the dumb money has failed to see coming.

In the face of this quick analysis it is important to realise that you shouldn’t marry yourself to any one position. I have been slow in putting on new positions here in Q4 due to my concern over that inevitable dollar rebound. At the same time it hasn’t stopped me completely. If it did, it could mean that I might miss out on some great moves north, potentially breaking out of my current grid extreme at 1.37. As the saying goes: the trend is your friend until the bend at the end. I am going to suffer the odd losing trade when the trend does end, but in the mean time there is still great opportunity for making money. I can’t let the fear of those future losing trades prevent me from putting on trades now.

The poor US Existing Home Sales and Consumer Confidence data numbers that came out yesterday certainly pointed to more pain for the dollar in the medium term. The chances of a dollar recovery in the short term dwindled sharply for me, and I was comfortable with placing a new Q4 long entry.