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September 15, 2009

Liquidity Trap

All systems are go for our plan for the buck to perform a final tumble into a primary wave low. The dollar chart is bleeding daily and is acting very much in wave-ending fashion, which is to say we have an environment in which everyone thinks the dollar simply cannot stop falling.

dollar chart

Personally, I don't think the 76 pivot will contain the 2-3 days of nasty selling we still await. A swift move down to 74 should put a crescendo on the panic.

Both gold and silver held important numbers in today's session with gold closing near $1010 and silver conquering $17. A quick plunge in the buck should pop the metals nicely and draw in enough late-comers to set up the next consolidation patterns. The market will not make it easy for those of little faith, and so the crowd will be promptly punished with a pull-back.

silver chart

If I am correct about the buck being set up for spike lower followed by a consolidative rally, silver could easily surge higher and then bounce around between $16.50 and $19.50 while the buck meanders back to its 200DMA. Similarly, gold should perform a few shakes of its own, but will probably hold $1000 for the duration of the bull.

When the dollar breaks again, which I'm guessing will happen by early December, we will witness the most spectacular gains of the precious metals bull market. I expect gold to pass $1500 and silver to surge past $30. My game plan has not changed: hold tight until we see a panic sell in the buck followed by a swing low. Afterward, I will reduce my pile of silver contracts, but probably will leave my mining shares unfettered until the anticipated spring high. If things unfold as outlined, I will be soaking up silver contracts in unprecedented fashion when the buck returns to its 200DMA.

As for equities, a sudden drop in the buck could induce the short squeeze I've been talking about for a couple weeks. If I had to venture a guess as to where that squeeze would lead the S&P 500, I'd say somewhere between the 1100 and 1150 pivots.

s&p 500 chart

Note that the banks have not participated in the latest round of new highs. The loss of leadership from this sector could be any early warning sign.

banking stock index

Also note that the chart of the SPX priced in gold has broken. Money is no longer favoring stocks, but rather gold.

spx priced in gold

Remember that this entire game plan is anticipatory. If the buck does not behave as described, the plan will have to change. We'll just take it a few days at a time.


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