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September 23, 2009

Caveat Preemptor

The double talk coming out of Washington these days is preposterous, laughable. In its release today, the FOMC announced another $1.25 trillion in purchases of agency paper, yet in the same breath inferred they would "slow the pace". I guess these clowns take their clue from Obama who thinks free trade hinges on his ability to punish China via tire tariffs. In any case, the dollar soaked it up, rising about 2/3% post-Fed. The technical action seems to now suggests the Fed may have preempted the selling crescendo we sought and triggered one of the caveats described yesterday.

dollar chart

The timing fits nicely since our counter-trend rally should last 8-10 weeks, putting us within the usual Nov/Dec timeframe for launching the parabolic move into spring. Also, at 76 the DX was sporting a 9.2% discount to the 200DMA, a level that has frequently spurred bounces. Obviously, we need follow-thru to confirm a reversal. A move above yesterday's high would form a swing low and greatly increase the odds we are commencing a counter-trend rally.

Accordingly, equity indexes sported nice reversals, as well.

s&p 500 chart

The NDX sports a similar setup. Further confirmation to significant reversals occurring here would be continued downside in equities along with accelerating volume.

My game plan for trading the dollar's counter-trend rally has been to reduce precious metals exposure and short equities. Since the transition does not seem to be unfolding the way I anticipated, which is to say with a panic sell in the dollar, I am going to take things gradually. I intend to dump some silver futures, but I will wait on shorting equities until we see further confirmation. Now one shouldn't think I'm getting bearish on metals... I believe they will be very much higher come spring. However, I simply think it prudent to reduce exposure during a counter-trend rally in the buck. In doing so, I am simply taking off the leverage in the Docfolio with respect to PMs by selling some futures contracts. I do not intend to sell any mining shares. Furthermore, if 76 is taken out on the DX, I may be forced back into my silver at higher prices.


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