Clive Maund
gold, silver, & oil shares
DOLLAR SENTIMENT ANALYSIS - rally exhausted?...
originally published June 9th, 2010It’s worth us taking an updated look at the dollar index here, on account of the extremely bullish sentiment now prevailing in respect to the dollar, which we of course take as a warning.
When we last looked at it some days back it was pointed out that in marked contrast to the powerful rally in 2008, the latest dollar rally was largely due to the misfortunes of the euro, as the dollar index weighting is more than 50% comprised of the euro, and that, therefore, assuming the euro doesn’t crumble even further, the dollar could even tack on additional gains in the event that commodities and stocks drop further, as a result of a “flight to safety”. This observation being made of full awareness of the technically oversold condition of the stock market that could result in a sizeable intermediate rally.
However, the latest sentiment readings for the dollar all but preclude further significant progress by the dollar. Public optimism regarding the dollar rose to 79.2% over this week to reach its second highest level since records began in 1999 (the highest level ever was 79.5% in November 2008). Since extreme readings on this indicator HAVE ALWAYS CORRESPONDED WITH DOLLAR PEAKS, it is not unreasonable for us to expect a reaction in the dollar soon, or at least a period of choppy action that is later followed by reaction.
As we can see on its 3-year after a vigorous rally the dollar has arrived in a zone of strong resistance in a very overbought state, making reaction likely soon. While it has opened up a very large gap with its 200-day moving average, it is not as extreme as that of late 2008 at the time of the panic into Treasuries. According to the technical condition revealed by this chart, there is some scope for limited further upside, although it could now go into reverse anytime.
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