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June 16, 2008

No Support for the Dollar

We had a few interesting movements in commodities today. Let's dive in directly into the one that's been on everyone's mind, trader or not. Oil:

oil chart

For several weeks now I have been saying that oil's run will end when we see a big failed rally day. Well, I think today qualifies. Oil started the day up $4, breaking out of what appeared to be a consolidation zone, and looked as if it were going to punish us drivers with another monster rally. Then, despite the dollar being down sharply, the rally failed and crude ended the day off around a buck. So, I'm going to go out on a limb and say that oil's card has been punched. We should see it work it's way back down to the $100-110 range if this read is accurate.

Precious metals also started the day off strongly, but they held onto most of their gains. My guess... and it's only a guess... as to the rationale behind today's action is that traders were on guard for more strong-dollar language out of the G7 meeting. When such verbiage did not materialize, the dollar tanked and metals soared. Let's see if those gains can now be defended. From the technical perspective, I'm watching this potential triangle in gold:

gold chart

Potential Elliott Wave labelling is also included to show a possible bullish scenario. The big blue "2" marks the end of major Wave 2 for the whole bull market. The small red numbers break down the first wave of major Wave 3. If this labelling is accurate, we should see a run into the $1100 range to end this wave 1 of 3, followed by a more significant correction in gold's price. I would take a higher resolution of the triangle as a sign that this scenario is unfolding.

As for equities, today was just noise. Nothing that happened today changed the picture described in yesterday's post. I am still looking for a test of the 1370 area on the SPX, though I will note there is a remote chance that today's near-miss at 1365 was it. Also note that volume has been declining rapidly during the course of this 3-day bounce. If we get a gap higher on tomorrow's open, I would be quite keen on shorting it.

For those of you who have not seen Gary's e-mail to subscribers from this past weekend, it has been posted with his permission as the blog's Mid-Year Review. I highly recommend a couple runs through the article.


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