To The Moon

The current US financial market has flashed a very strong red warning signal: a strong dollar may return, and the US Dollar Index (DXY) is likely to experience a short-to-medium-term impulsive upward rally in the near future. From a technical perspective in the futures market, the DXY has broken through crucial resistance levels. Following the typical price action rules of a "head and shoulders bottom" pattern, the dollar's rise could mirror the previous decline in crude oil, triggering an impulsive upward trend of significant magnitude:

$USD Index(USDindex.FOREX)$ $Invesco DB US Dollar Index Bearish Fund(UDN)$ $Invesco DB US Dollar Index Bullish Fund(UUP)$

Under the influence of this short-term dollar pulse, commodities will bear the brunt of the pullback pressure. Subsequently, gold and silver may complete their final bottoming process during this market move. Meanwhile, the Hong Kong and A-share markets, as well as US equities that have rebounded to elevated levels, will inevitably face renewed retracement pressure.

$China A50 Index - main 2606(CNmain)$ $Hang Seng Index - main 2606(HSImain)$ $Hang Seng Tech Index - main 2606(HTImain)$ $HSTECH(HSTECH)$ $HSI(HSI)$

Of course, regarding US equities, there is no need for excessive panic this time, as the medium-to-long-term upward trend is unlikely to be reversed. If you are a long-term bull, as long as you manage your position sizing over the next 1-2 months and wait out the corrective volatility, US stocks have a high probability of continuing their upward trajectory.

I say this for two reasons. First, the bearish trend in crude oil is clearly not over, and the market's pricing of high interest rates (including future rate hikes) appears somewhat overdone. Given the sensitivity of tech stocks to high rates, combined with political considerations ahead of the elections, a substantive rate hike this year may not actually materialize. Once this excessively hawkish expectation reverses, the DXY will retreat from its highs, thereby stimulating US equities to break out and rally again.

Today, let's take a deep dive into the macroeconomic logic and capital flows behind the impending upward cycle of the US Dollar Index.

The Strong Dollar's Counterattack: An Impulsive Storm Driven by Over-Pricing

Many investors might feel confused: Why is the dollar index rising against the trend when other countries are hiking rates while the Federal Reserve remains on hold?

The answer lies in the "pricing expectations" of the US financial system. The current US financial market has fully priced in the expectation of a 25-basis-point rate hike in October this year. Looking at the latest developments: the 2-year US Treasury yield has climbed above 4.0% and remains in an upward trend;

$US2Y(US2Y.BOND)$ $US10Y(US10Y.BOND)$ $iShares 20+ Year Treasury Bond ETF(TLT)$

In the derivatives market, the swap market's pricing for rate hikes in 2026 has once again broken through the threshold of one full hike. It seems this expectation will be hard to shake off in the short term.

Furthermore, in the latest FOMC (Federal Open Market Committee) meeting, 9 out of 18 members agreed to hike rates this year—exactly half. Coupled with the presence of hawkish figures like Warsh, the market currently firmly believes that the probability of a rate hike is extremely high.

$S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $E-mini S&P 500 - main 2609(ESmain)$ $Invesco QQQ(QQQ)$ $NASDAQ(.IXIC)$ $E-mini Nasdaq 100 - main 2609(NQmain)$ $E-mini Dow Jones - main 2609(YMmain)$ $Dow Jones(.DJI)$ $Micro E-mini Dow Jones - main 2609(MYMmain)$

These intense rate hike expectations have directly spawned the "red signal" we see on the charts—the DXY has broken through a highly critical resistance level. From a technical pattern perspective, the dollar has formed a very classic and massive "head and shoulders bottom" and completed the breakout. Once this pattern is established, the dollar's rally will likely mimic crude oil's previous plunge, triggering a substantial impulsive move.

Take a look at the previous price action of crude oil—doesn't it look strikingly similar?

$United States Oil Fund LP(USO)$ $WTI Crude Oil - main 2608(CLmain)$ $E-mini Crude Oil - main 2608(QMmain)$ $First Trust Natural Gas ETF(FCG)$ $ProShares Ultra Bloomberg Natural Gas(BOIL)$ $Natural Gas - main 2608(NGmain)$ $Energy Select Sector SPDR Fund(XLE)$

"The wind sweeping through the tower heralds a rising storm." Under the pressure of an impending strong dollar comeback, risk assets will be the first to face pullback pressure. The earliest hit, of course, will be commodities and precious metals that previously saw significant gains. We have observed that, apart from minor metals with aggressive trends like tungsten and germanium, prices of other commodities, including copper in the A-share non-ferrous metals sector, have already begun to plummet;

$Copper - main 2607(HGmain)$ $United States Copper Index Fund(CPER)$ $Invesco DB Commodity Index Tracking Fund(DBC)$

The Invesco DB Commodity Index Tracking Fund (DBC) has also printed a very distinct top pattern.

Precious metals like gold and silver have also initiated a new round of declines. For gold, once the previous low is breached, it is highly likely to test the deep lows around 3800.

$Gold - main 2608(GCmain)$ $SPDR Gold ETF(GLD)$ $iShares Silver Trust(SLV)$ $Silver - main 2607(SImain)$

Therefore, during this dollar pulse cycle, do not rush to catch a falling knife in precious metals. Simultaneously, I have already trimmed my A-share positions to avoid the potential "final dip" that Hong Kong and A-share indices might experience in the short term.

Will the Fed Actually Hike Rates? Highly Unlikely

Although the market is currently shrouded in heavy rate hike expectations, my personal assessment is that the market has over-priced this hawkishness.

The Fed's policy rates actually trail inflation expectations, and current inflation expectations are trailing oil prices.

Looking at the sub-components of US price data, although there is a general upward trend recently, the inflationary effects brought on by tariffs have run their course. The only remaining "leading force" capable of continuously driving prices higher is energy. As long as energy prices can stabilize in this wave, there is hope for inflation to cool down.

So, can energy prices stabilize? The answer is a high probability of yes. Following the sharp drop in crude oil over the past two weeks, institutional short positions on oil have visibly surged.

The backwardation (spot premium) in crude oil futures has also significantly retreated. This implies that the bearish trend in oil may not be over, and the futures market is indeed pricing in a scenario where crude has topped out for an extended period.

Once crude oil prices manage to pull back to around $65 and drag down energy-driven inflation expectations, the underlying logic for a Fed rate hike will be dismantled. Furthermore, this being a midterm election year, high interest rates and a stock market crash would severely impact the incumbent administration's electoral performance. Therefore, current rate hike pricing is highly likely to reverse in the future.

Consequently, a strong dollar only brings a short-term impulsive rally. Once these expectations are falsified, the DXY will retreat from its highs again, which will untie the restraints on the upward momentum of US equities.

Capital is Still Betting on US Equity Upside

Finally, let's look at the US stock market, which sits in the eye of the storm. Under the pressure of a strong dollar, the S&P 500 has once again fallen below its 20-day moving average, and the volatility of high-level pullbacks continues. But why do I say the medium-to-long-term upward trend of US equities is hard to reverse?

Capital doesn't lie. According to the latest weekly fund flow data, the exposure of both large institutions and retail investors to US stocks remains massive. Data from Goldman Sachs' prime brokerage desks shows that the initial institutional sell-off has concluded, with capital (including single stocks and macro ETFs) edging up slightly in recent weeks:

$SPDR S&P 500 ETF Trust(SPY)$ $MACH7 TECHNOLOGIES LTD(M7T.AU)$

In particular, capital inflows into the tech sector remain net positive.

Additionally, according to Bank of America surveys, equity allocations in household and private client accounts remain elevated after being significantly ramped up at the beginning of the year.

The massive long exposure to US equities from both institutional and retail players practically guarantees that a severe market crash before the midterm elections is highly unlikely.

However, during Q2 and Q3—traditionally high-risk periods for US stocks ahead of elections—continuously chasing index highs amidst high-level volatility and a dollar pulse is clearly unwise. At this juncture, continuously rolling short put options (selling puts) at lower strikes may be a far more suitable defensive strategy.

For instance, you could consider selling puts below the previous lows of the S&P 500, below Micron's 20-day moving average,

below Micron's 20-day moving average, $Micron Technology(MU)$

or below the $194 level for Nvidia. $NVIDIA(NVDA)$ $Tradr 1.5X Short NVDA Daily ETF(NVDS)$

The time horizon could be set for 1 to 2 weeks out, depending on your desire to capture time decay (theta) and your margin requirements.

Of course, every strategy must be equipped with a safety harness—once the underlying asset drops below your strike price, you must consider cutting losses decisively and avoiding emotional trading.