Hedge funds are bearish the dollar. I am not.

My recent exploits in EUR/USD have offered textbook examples of how I play the twists and turns in the tricky currency markets using my tramline methods (incidentally, aren’t they all very tricky?).

But the recent gyrations in EUR/USD have been particularly volatile. Many traders I am sure have been puzzled by these antics where whipsaws are common.

So today, I will follow up on this trade because I have combined analysis of the short-term chart with the medium-term and fixed a maximum upside target which was met yesterday.

In my last update post on 1 April, I held a long position from the 1.12 area and observed the “Yellen rally” in five motive waves on the hourly:

EUR/USD spread betting chart

The potential was for the market to start a turn back down since five waves appeared completed and there was a nice momentum divergence.

But there was also another option: the market could go on to make new highs where my wave 5 was in reality just a larger scale third wave with waves 4 and 5 to come. I certainly did not want to miss that possibility to grab an extra profit.

And that is why I decided to use my split-bet strategy where I took a profit on one half of my position and left the other part open and raised my protective stop to at least the break-even point.

Since then, the market rally was maintained and rose to my target, which I gave earlier at the 114.50 area and this was the long-range daily chart I used to determine this target:

EUR/USD spread betting chart

And this is what I wrote: “The rally has carried well above the Fibonacci 62% level where most turns are made. The next heavy resistance lies at the 78% level at around 1.1450, which is about 70 pips from the current price. That would be a nice addition to profits.”

Here is the daily chart updated:

EUR/USD spread betting chart

Yesterday, the market spiked up to 1.1465 and then fell back making a direct hit on my target where I was waiting to take the remaining profit.

Here it is on the hourly:

EUR/USD spread betting chart

The churning over the past few days has been difficult to analyse in Elliott wave terms, but I believe this is the most likely count. Yesterday’s spike high was the final fifth wave. Also, this churning has been contained in the channel between a lovely tramline pair.

So with the 1.1450 Fibonacci target having been hit on a momentum divergence, and the hourly showing a complete five up (also on a momentum divergence), I have a terrific setup.

Breaking the lower tramline should help cement my bearish case.

Lurking in the background is a growing bearish sentiment picture towards the dollar. I have seen recent headlines referring to the death of the dollar. Here is one from Bloomberg: “Hedge funds abandoning dollar’s biggest bull run in a generation” .

Hedge funds have been shedding long dollar bets in droves and now hold only a fraction of their former long futures positions. Apparently, they have followed like sheep the Fed’s latest “hint” that they will now go easy on rate rises.

And this abandonment took place in a market that showed no clear trend. Normally when hedge funds take one course of action, it moves the market mightily, but not this time. Is that a vital clue that the next big move in the dollar will be up?

If I am right, they have made a very big mistake – but have followed their traditional pattern of being maximum wrong at major turns.