The dollar bulls are stampeding

published 9 November 2015

This weekend the media has been all over the story of Friday's shock 'bullish' US jobs report with confident predictions that the dollar will now rocket and the pound and euro will collapse. Both took a major hit on Friday following release of the report. I have been bullish the dollar for many months, and these market moves simply backed up my long-held view.

One journalist wrote that Friday's report was a watershed event that would determine exchange rates well into next year with the GBP/USD rate in particular collapsing.

Several journalists seem to have this opinion. Their enthusiasm has been encouraged by the fact that there were a lot more jobs created in the previous week than most had expected. The unemployment rate dropped a tad to 5% and taken together, this practically guarantees the Fed will announce a 0.25% rise in the Fed Funds rate in December, so they say.

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But as a trader, the sheer confidence of that assertion makes me concerned. The media are suddenly convinced the dollar will rocket. My 'media headline indicator'is buzzing could a rally lie ahead for the euro and the pound?

Before I get carried away by the headline data, let's take a look at that US data. Here is the monthly non-farms jobs growth series chart:

The red bar is the October figure. It is clearly not an exceptional number! In fact, it is about the average monthly jobs growth over the past three years.

Not only that, but the jobs growth is clearly trending down off the January high. So my question is this: is the Friday data demonstrating a solid economy that would justify a Fed rate rise?

There is no doubt the dollar is in an uptrend and Friday's action has simply kicked it further upwards.

EUR/USD is following my roadmap and approaching my target

I beat the herd with two huge currency campaigns

I was short from the 114.50 and 113.50 levels and the market had hit the Fibonacci 62% support level. I expected a small bounce off that support in a small wave 2 before resuming the downtrend in wave 3.

This was the hourly chart I showed:

I did get a bounce, but it was minuscule the market blasted past the Fibonacci 62% support last week and has hit the 78% support level Friday on a overbought momentum reading. Could we have reached the wave 1 low of my red wave 2?

On the current daily chart, I have drawn in T3 as my first major target around the level of the March low at 1.0460. That low was my large wave 3 so now the market has embarked on large wave 5 which should take the market well below that point. The market is in wave 3 (red) which should terminate below T3. If this is correct, this third of a third pattern should ensure the descent is rapid.

But will the market descend in large leaps, as implied by my third of a third analysis? It is certainly possible. I have noted that when a market is in such a pattern, gaps open up, especially over weekends when 24-hour trading pauses. In fact, these gaps (or large daily moves) are what I call 'light bulb' moments when the market suddenly gets it and long liquidation emerges from the bulls who finally throw in the towel. They recognise that the dollar is indeed in a bull market and ditch their bearish analysis.

But with the done-deal December rate hike splashed all over the mediafront pages, not to mention all over the market gurus' weekend blog, has that sudden universal acceptance done great damage to the bullish dollar story in the short term?

In other words, will the euro and pound start a counter-trend rally from near here?

When a lonely bull pen becomes Pamplona

I smell a rat the 'US rates up and eurozone rates down' story seems to me to be too obvious to have lasting value. Recall Trader Joe Granville's maxim: "If everybody thinks it is obvious, it is obviously wrong".

However, I am sitting tight on my short EUR/USD trades from much higher and my stance remains to short the rallies.

I have a feeling I shall find out very soon whether the market will make a dash for my T3 target sooner rather than later.

John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.

He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.

As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.