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October 5, 2009

Lines in the Sand

Markets never make things easy. There are countless patterns that work often enough to make believers of the masses, except that when they fail, they take back manifold against the gains. There are countless indicators with the same attribute. In fact, even carefully developed systems ensnare the seasoned trader who makes the mistake of applying his systems to all market conditions. The most successful traders have multiple systems, and the the trick to long-term success is not in their development, but in their application. More specifically... knowing when to apply each system.

Some systems are complex, involving proprietary indicators in conjunction with patterns. Others are elegant in their simpleness, such as Elliott Wave Theory. Regardless of the system being applied, one must have an escape plan. Stops. Lines in the sand.

My recent call for a counter-trend rally in the dollar is based on an EW read which has the 5th minor wave of a major selling wave ending with a bounce off a significant pivot at 76 on the DX. As the dollar bounced, the hourly view of the S&P 500 formed a 3-wave decline with the potential to continue into a 5-wave impulsive move. My lines in the sand are quite simple:

us dollar chart

s&p 500 hourly chart

A couple weeks ago, I was stalking a culminating panic sell for wave 5 of the dollar's decline out of March. More recent action suggested that an end to wave 5 may have already been found. A breach of 76 on the DX will mean I am wrong about the timing of the end, but not necessarily about my wave count. Perhaps we'll still see a panic sell to the next lower pivot at 74, but if such were the case, this 5th sub-wave would be quite long in the tooth, time-wise. In any case, until 76 is breached, the Docfolio will remain a mere 100% invested in precious metals assets. If I catch the scent of panic, however, leverage will return in an instant.

As for equities, if our idea of an intermediate-term decline is going to keep a heartbeat, we pretty much need to see immediate weakness on the open. Our potential wave 4 bounce has eaten up its entire allocation of handles. Further strength and the beginnings of my short book will go flat.

If the action in gold, silver, and mining shares are any indication, we'll being seeing a panic in the buck right soon. Gold popped up to a new high today, silver reversed a bearish candle, and the daily charts of many miners appear to show consolidation ready to break higher. This drama just keeps getting more interesting by the day.


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