A Contrarian Currency Play

Is the euro energizing for a new run? Or is it running out of steam? We are pushing up against the highs from last December and September. It is hard to argue against its present uptrend (because it certainly has gone up). The question remains, will it continue to rise?

I must confess, it feels every bit like a euro top to me. But even gasping tops can continue to rise a long way.

From a technical perspective, which is what I think we are really trading on, euro sentiment has really, really reached an elastic extreme. At the end of last week alone, futures open interest was up a monstrous 75% in just three days! That is extreme sentiment. And you know how I often say that 95% of the people who enter the forex game end up broke? It’s a reasonably predictable, bankable phenomenon that the ‘crowd is almost always wrong.’ That being the case, sentiment extremes often provide good opportunities for reversals.

Add that to the fact that nearly every grocer checker and bag boy knows that the dollar is doomed, and you have a nice scenario for dollar strength as the big boys take advantage of the ‘weak longs’ in the market… those who bought in at the top. If the rise is to continue, I would look for a pullback to the 1.44 area for a new entry.

The Daily Reckoning