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November 9, 2006

Dollar Watch

A few days ago when the dollar index took a half-point spill, precious metals remained flat. Perhaps metals traders were observing that the dollar held support and so were cautious about a bounce. Today, the dollar took another spill... a bit less than a half point... but failed to hold the aforementioned trend line. Metals traders responded by popping a few corks and putting on a party. Gold soared $20 and silver gained a cool 60c... nearly 5%!

stock chart

Traders shorting the head-and-shoulders pattern in the XAU got spanked. Miners as a group put on better than 4% gains with my long-time favorites, Newmont Mining and Pan American Silver, slightly lagging, but still gaining better than 3%. I was already positioned aggressively in NEM, but today's high-volume upside action induced more call buying on my part. I've been writing here about the potential for an explosion to the upside in the metals arena, and it may very well be in full gear.

I've mentioned several times that the dollar is the key to the mysteries of a preposterously strong equity market, as well as the next wave up in the metals bull market. So how did stocks do today? They were down modestly, but considering the celebration that was expected in the wake of another optimistic presentation from Cisco, I'll take down modestly, especially when morning gains are reversed. More importantly the NDX is flashing all kind of reversal signals with regard to price action, volume, and momentum divergences.

stock chart

It now seems that the market is set up perfectly to fool the most number of people by heading lower. Psychologically, the bulls are emboldened after seeing new highs in the wake of six straight down days, along with glowing forecasts from Cisco, and the bears are despondent for the same reasons. Technically, we are seeing a loss of momentum with reversal patterns. Fundamentally, the dollar is breaking down and new evidence surfaces daily that the housing bust will be more severe than broadly expected.

It is interesting that while I was taking shots on the short side during September and October, I did so with a bit of reservation behind most of my trades. This week, as I buy S&P puts and short some tech, I do so with a relative calmness, almost like I know this is the time. So the market action in coming days and weeks will not only affect my portfolio, it will also provide a verdict on the strength of my instinct. I go out on a limb to share this sentiment. If I am wrong, my ego will no doubt be a piñata for blog readers.

Disclosure: Long NEM, PAAS; Long NEM Calls; Short NEM Puts


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