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November 6, 2008

Dollar Crush

The Brits bombed Wall Street today with a sharp interest rate cut that sent the U.S. Dollar Index soaring. As we all know, a rising dollar has recently correlated very closely with the price of just about everything else falling. Today's move brought equities their second consecutive 5% swoon and took a big bite out of commodity prices. The S&P 500 was escorted all the way down to 900, and silver dipped below $10 after printing near $11 early in the day. The volatility of this mid-term rally has become quite trying, indeed.

We are sitting at another critical juncture. Further weakness will take out the October 10 close and could induce selling back to the 10/10 low. Such a move would pose a grave danger because we've already seen what appeared to be the back-test of the low. If price returns to the October lows, it probably will not stop there.

stock chart

I do not believe such a sell-off will occur, but there is no point belaboring the issue. Tomorrow's first hours should give us the answer. My guess is that stocks gap higher and keep running. However, I am am not pushing my longs just yet because I don't like to trade guesses. There will be plenty of upside to capture once we know the waters are safe. For the record, I did take a stab at the long side, as planned, when the SPX sank to 930 since I thought the 925-930 zone would provide a pivot point. Obviously, it did not, and I was out later at lower prices.

Precious metals showed a bit of strength this morning when they were initially higher even in the face of a rising dollar. Ultimately, the continued rise in the buck dragged them down. The reversals printed ugly candles on their charts, and I'm concerned now that more weakness is in the immediate future.

silver chart

Now, a further decline in metals from here would seem counterintuitive. One would think a metals decline would occur in conjunction with a rising dollar, and if the dollar rises further, how are stocks supposed to rally? Given the conflicting readings, I took the only natural course of action and reduced my position size by dumping my silver trading position. I am still sitting on a moderate GDX long, which I chose to hold since I believe the miners will continue to outperform the metals near-term.

Perhaps tomorrow's session will clear up some of the doubt and discrepancies. Until then...


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