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January 20, 2010

Don't Panic

Stocks and commodities got whooped with the ugly stick today as the dollar index surged an impressive 1.2%. It was certainly frustrating action for those of us with heavy precious metals exposure, but so far I'm not too concerned. Basically, I think the markets are playing out what I was anticipating, only two weeks late. Which is to say, the dollar is experiencing a short squeeze up to its 200DMA and precious metals are experiencing a panic sell to shake out excessive optimism. As you may recall, I was expecting this action to unfold during the first week of the year. If it had done so on time, so to speak, I would have been able to enter the bulk of my current holdings at much better prices rather than having chased a rally. Such is the nature of the game.

Nevertheless, the outlook has not changed.

us dollar index chart

The strength of the dollar rally over the last three days certainly gives the impression that we're about to see another leg similar to the December rally. I believe, however, that the dollar is doing nothing other than what this author expected of it: testing the 200DMA in a manner which gets weak hands to lose positions. If the DX manages to close above the 200DMA for several days in a row, and especially if it crawls along the top of the 200DMA, we may have to rethink a few things, but until the buck does something unexpected, there is no reason to panic.

There was one extremely positive sign for precious metal buffs today. Did anyone notice the action in palladium? After tanking more than $12, Pa reversed and closed up on the day. In fact, in overnight trading palladium is printing new, post-crash highs. If a liquidation event were about to occur, it should be dragging down everything, including... and perhaps especially... market leaders. The divergence can likely be explained by the greater attention given to gold and silver due to ETFs and history. Sentiment swings are greater for those metals and needed a rinsing.

In summary, my view is that we are within a couple days of swinging a bottom to this panic and then should be off to the races. I'd say we should also be able to judge the accuracy of this outlook by this time next week. Hopefully, we won't be too much the poorer by then!

 

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