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December 17, 2008

The Standard Bet Size

Okay. I'm not sure how well my grammar will hold together tonight. I plead bourbon. And gin. After all, 'tis the holiday season! So, let's start with the dollar. Its collapse has been breathtaking. Six straight down days have knocked seven points off the dollar index, and we're down nearly ten points in three weeks. I don't think the dollar has ever seen such swift action. I'm too inebriated to bother with the research, but I'd bet a buck (the standard bet size) that I'm right.

dollar chart

The most obvious level for dollar support is the 200-day moving average. This MA has historically provided solid pivot points, and is now within the 76-80 consolidation zone. What is my confidence level that the 200 DMA will turn the buck higher? Mediocre. After all, less then two weeks ago I figured that 80 would provide the eventual support for the dollar over the entire mid-term rally. The question that has been on everyone's minds and a frequent topic of discussion in the comment sections of various blogs including The DOCument is why have stock and commodity prices not rocketed with the collapse of the dollar?

Here is a clue:

bond chart

Money has been fleeing into bonds, and I think the behavior is little more than end-of-year window dressing. Fund managers simply want the guise of prudence on their year-end statements. It is panic buying, pure and simple. One would think then that the new year would provide the turning point for the bond market. However, smart money will always exit early, and I think the capitulation-like volume sported on the TLT and TBT charts shows the end is nigh. I opened a modest position in TBT today and intend to add to it as my confidence level grows.

Whether it be the bond market or some other factor, funds have certainly not been flowing into crude oil the way we anticipated. Who would have imagined that a rapid 10% drop in the buck would not be enough to spark a massive rally in crude?

oil chart

stock chart

When the buck finally bounces, it will likely give oil... and equities... a big enough wallop to scare remaining weak hands out of play. We will then see our rally. When crude kicks into gear, I expect it to shoot to somewhere between $70-90 per barrel.

Like yesterday, I will wrap up today's post with an update on the SPX. Today's pull-back came on receding volume (good), but we have an internal indicator to pile on top of the Adv-Dec reading and put/call ratio.

index chart

Zooming into the 15-min view gives us a clue to a reasonable level of retreat:

index chart

SPX 885 seems like a solid support level, but if it fails, keep a close eye on SPX 850. Under no circumstances do we want to see a close below 850, a very important pivot on both daily and intraday charts. Such a move could very well smother the idea that we are in the midst of our mid-term rally.


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