The folks at Business Insider recently posted the following chart showing the position of the futures market in terms of the US Dollar. It comes from the weekly Commitment of Traders report and shows that the net long USD position of the market has gotten near the highest levels from 2012.
The suggestion of that article is this kind of extreme reading is likely a signal the market is due for a reversal. Certainly it has been the case that extreme net long or short positions have seen the greenback turn in the opposite direction, though it is worth noting that the case of both the 2011 low and the 2012 high, there was a bit of a lag before the market began trending the other way.
With that in mind, it is worth taking a look at the current chart of the USD Index to see what it might tell us about the technical condition of the market. Specifically, do we have an overbought market right now?
The weekly chart below does definitely have some interesting features. The one which stands out most clearly in support of the case for an overbought market is the RSI reading, which is depicted in the lower plot. Notice how it has reached very near to recent prior peaks.
That said, we don’t have a lot of other indications of a market which has gotten overextended to the upside. The chart pattern itself has been classically stair-step in nature, which is not the type of action which tends to create strongly overbought conditions. The Bollinger Bands have been widening, but at this stage are not exactly wide, as shown by the middle plot.
I think at this stage the odds favor a bit more upside for the USD. You will notice that these bias extremes do not come as singular spikes in most cases. That means there’s room for further appreciation, even if the market turns down as soon as the bullish imbalance starts to come back down. Should there be a lag between imbalance shift and price reversal, though, it could be a couple months before the greenback finally tops out.
In any case, the break of the 2012 highs does support at least a little bit more upside action. I don’t know that a test of the 2010 highs is in the cards for this particular uptrend leg, though.