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October 26, 2009

Speak of the Devil

The odds that the dollar has embarked on its countertrend rally took a giant leap forward today. As noted over the weekend, we were looking for either a panic sell to a lower pivot or a close above the ~76 pivot on the DX. After a fat head fake early in the day, the buck reversed higher and gave us a clean break of the higher pivot.

daily USD chart

The plan for the Docfolio is to twiddle my thumbs (mostly) until the consolidative rally on the buck completes. I suspect an approach of the 200DMA will mark the next turning point. I will then get positioned for the next wave down in the buck, which I expect will accompany the most explosive move in precious metals in this bull market.

In the meantime, I plan to bump up my short side exposure to equities. These index shorts are intended to hedge my PM holdings, thereby preserving purchasing power when it is time to get leveraged again. My current short on the NDX is looking juicy as the index just suffered its second major rally failure in four days.

nasdaq 100 daily chart

The flip side to the dollar rally is the decisively bearish break from coil patterns posted by gold and silver.

gold graph

I'm not predicting a back-test, but rather staying aware of possibilities so my hand can remain strong. GDX also slumped heavily, but is at least approaching some near-term support.

gold mining ETF

If one were adventuresome, a trader holding GDX could wait for a bounce off the trend line and then write near-term covered calls at $48 or $49. The benefit would be to snag some income off the position while the dollar's consolidation unfolded. The risk would be to lose one's position if expectations are incorrect.

Here are a few other developments of interest:

bank stock index

long bond daily chart

stock market indicator

it is also interesting to note that in several respects... depth of sell-off, oscillators readings, etc... the current slump emulates previous conditions in which the wise course of action was to buy-the-dip. If price can surprise traders with a bit more downside here, it will be another strong sign of a changing environment.


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