Today's comment is by Jack Crooks, our Currency Director and editor of The Money Trader and Crooks on Currencies

Dear A-Letter Reader,

Market sentiment rules the currency markets, as I pointed out in my very first A-Letter on September 1st.

My key way to gauge market sentiment is to look at open interest. Recently just looking at the euro's open interest, and paying attention to the mainstream media, helped me predict how the euro would perform later this year.

First let's review. My favorite measure of sentiment in the currency market comes from tracking open interest (OI) levels in the six major currencies traded on the Chicago Mercantile Exchange. OI is the summation of all unclosed purchases or sales. Think of rising open interest as fuel for the trend. The higher the open interest, the more money there is being committed to the market. It's not a matter of direction, up or down. A healthy trend in prices will be accompanied by rising open interest.

I told you that historical open interest in the 200,000 to 240,000 range for euro represented an extreme level. I use the word extreme because it tells you there is a one-way bet shaping up. In the case of the euro, it was a one-way bet that the euro would continue to climb against the dollar. The underlying contrarian definition of a one-way bet means that everyone who wants to buy has bought. There is no more buying power left to move prices higher. They have only one-way to go: lower.

The euro finally broke out of its seven month sideways trading range against the U.S dollar back around Thanksgiving Day. Open interest for the euro currency futures was just under 200,000 contracts then. After the breakout move higher in the currency, open interest began to clime rapidly. And that told me that a lot of buyers were jumping on the trend. Here's where it gets interesting...

* On December 2nd, a Saturday, The Economist magazine, had this on its cover, "The Falling Dollar." It was portrayed by a sketch of George Washington appearing quite shocked indeed and peering downward.

* On December 1st, Friday, which happened to be a fifteen month highest closing in the euro, open interest jumped to 220,000 contracts. This was well within our extreme level i.e. one-way bet zone.

I realize in hindsight this looks easy. It always is when you have hindsight on your side. Even if you were an aggressive short-term trader, you probably wouldn't have dumped your euro position immediately upon seeing 220,000 open interest and the magazine cover.

But if you were paying attention you would have recognized red lights were flashing, suggesting a sentiment extreme. Thus, you might have at least tightened up your trailing stop-loss orders. That means you would have locked-in more profit and prepared to play the euro from the short-side (that means you would sell the euro short now and hope to profit by buying it back later at a lower price-reversing the normal buy low and sell high to first sell high, then buy low).

If you are a longer term investor, and believe as I do that the fundamental economic background is in place for the euro to go much higher in the months ahead, you would use this information in a different way.

Instead of trying to trade a correction, which is always tricky, you might pick a spot and say, "If the euro falls to this level I am buying more because I consider it a bargain."

In other words, you feel confident in your long-term view and any fall in the euro over the next few weeks is simply a gift to lay the groundwork for more profits in the months ahead.

Sentiment is a powerful yet simple indicator. It's easy to follow and it can be used as tool for maximizes profits no matter your investment time frame.

JACK CROOKS, Currency Director, on behalf of The Sovereign Society

P.S. Please don't hesitate to email our customer service department if you are unsure of how to track open interest in the currency futures. You can email us at info@crooksoncurrencies.com. Also, I have two investment-trading services that can help you recognize this market sentiment. If you're a long-term, beginning currency investor, you might want to check out my Crooks on Currencies service, which trades currency ETFs. If you're a spot market trader, you may want to check out my service, Money Trader.