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January 5, 2012

Dollar Peak in Sight

Looks like we have a lock on a new daily cycle for the dollar as today's surge took the DX to a higher high. More importantly, stocks and precious metals held up amazingly well in the face of the dollar strength. I do believe a dollar peak is imminent. The DX 81.30 pivot is just overhead and may very well get tagged in the overnight session. I seem to be a lone voice crying wolf over the dollar here, but just ask yourself: If the buck were about to run away to the upside here, do you think other asset classes would be holding up so well?

Mountains of evidence back me up. Apart from the details discussed in recent letters, have a look at the euro chart:

Euro Daily

Likewise, the U.S. Dollar Index tends to tag significant pivot levels as a trend changes, and so I have my eye firmly on that DX 81.30 level:

DX Daily

Sentiment remains quite high for the dollar, and almost no one believes the buck weaken here given the environment in Europe. I believe that once the buck rolls over, the move lower may be violent... perhaps sparked by a news event... trapping people on the wrong side of the trade. The conditions are ripe for a trend change. The market just needs a catalyst.

I do intend to play the DX on the short side, but since the Docfolio already possesses some anti-dollar positions, my direct dollar play will be limited-risk in the form of euro calls. If the DX manages to tag its overhead pivot, and then post a bearish reversal, I will take a shot at calling a top by purchasing half of my intended position. A subsequent swing high will bring the other half. Otherwise, I will just chase the dollar lower on a failed daily cycle.

Another question for those anxious over precious metals: If gold had not just left behind an important low, do you think it would be able to resist a dollar surge in this manner? I think not. If an intermediate decline were still in play, gold simply would not hold up while the dollar surged 1.3 index points in two days.

Gold Daily

If the dollar rolls over presently, as expected, I suspect gold will make a run for its 150DMA before taking its first pause in this new daily cycle. With such a display of strength and the expectation for an imminent dollar peak, augmenting my PM book seems to be not only justified, but prudent, so I picked up a handful of silver contracts.

Stocks also resisted the dollar for a second day, and while the timing band for a daily equity cycle approaches, that band is also three weeks wide, offering plenty of time for a continued rally before prices roll into a cycle low. I must say that various asset classes seem to be sniffing out a dollar peak and are poised to explode higher once that peak becomes apparent.

For those interested, my 2012 Outlook has been published.

Docfolio Update: Bot March silver futures


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