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September 8, 2009

Bucking the Trend

A one percent plunge in the U.S. Dollar Index confirmed our expectations for continued impulse selling during this primary bear wave. The only question remaining concerns whether we are now witnessing the 2-3 days of wave-ending behavior discussed over the weekend or whether the selling will last longer. The answer will be easy to discern, I'd say, oh... about 2 days from now. If we continue to plunge straight to the 76 pivot, the odds rise substantially that we'll print a low for the wave. If we chop our way down there over a week or more, then we'll have to reset our counter and perhaps our target.

us dollar chart

Note that the index is currently about 7% below its 200DMA. I believe it was Gary who once noted that dollar declines tend to end once the index extends 8%+ below this moving average, so 76 puts us in range, but approaching 74 is certainly not out of the question. If we see a 3-day plunge into one of those pivots followed by a swing low, I'm going to assume the major countertrend rally has begun.

A clue that the dollar may be close to printing a low for this move may have come from precious metals. Despite the sharp fall in the buck, gold and silver failed to hold onto big gains. Gold was firmly rejected by 4-digit territory, falling $15 off the session high while silver gave up a juicy 40c of its gain. These reversals are a potential sign of exhaustion. After all, silver has run more than 30% in two months! In any case, I don't think PMs would be letting intraday gains slip away like this if the dollar were going to keep plunging. At this point, though, we are just stuck watching the buck. If it behaves as if this selling wave is ending, I will probably reduce or eliminate leverage with regard to precious metals. But until my suspicions are confirmed, I won't be tricked out of my positions.

As for stocks, until we see a swing low in the buck or a swing high in the SPX, I see no reason to risk immense frustration with a short line. The next correction is apt to be more severe, erasing a good portion of the gains since March, if not all of them. Therefore, exercise patience and take a short line when the odds and the momentum are both more favorable. At the same time, stay alert because if this leg of the dollar decline is, indeed, putting in its swan song, the swing could be just ahead of us.


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