As you look at the Commitment of Traders chart shown below, you can see that this LONG DOLLAR trade is extremely crowded. Markets in this condition, while they can most certainly continue heading higher, are very unstable and quite susceptible to violent downside action should a technical trigger force a bout of long liquidation.
Friday, we got a bit of a hint as to what might happen to the Dollar should sentiment shift. It was hit rather hard heading into the weekend ahead of the crucial Greece vote as traders began reacting to the possibility of coordinated Central Bank activity early next week. The eager buyers from Monday and Tuesday all ended up as panicky sellers with the market completely erasing its gains early in the week.
Note that the selling did stop at the 38.2% Fibonacci Retracement Level of the rally that began in May.
If, and this is a BIG "IF", the Central Banks do indeed announce a coordinated liquidity infusion, this massive speculative long position may very well be vulnerable. While certainly the problems afflicting the Euro Zone are not going to be cured by any such Central Bank action, traders will, at least for the short term, view such action as lessening the need for a safe haven. That is when things could get interesting to say the least. I would expect an initial drop down to the 50% retracement level where the mettle of the bulls will be tested.
Longer term, one can still make the case that as soon as further problems begin flaring up over in the Euro Zone, the Dollar will head higher once again but keep in mind, today's markets are dominated by computer algorithms and if those things say "SELL" in regards to the Dollar based on any downside support levels being violated, there is an ENORMOUS amount of longs who are going to get their heads handed to them.
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