Thursday, August 4, 2011

Updates - Dollar, Gold, Stocks

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The reversal yesterday failed today with acceleration to the downside. The target trendline I have suggested has now been exceeded. So all levels of confirmation of a large upward pattern completing are in place. HOWEVER, that doesn't mean that now is a good time to short. Often times these first moves down after major completions are extremely fast but short lived, giving way to more drawn out counter trend rallies which will provide safer lower risk short-entry opportunities. The target for the head and shoulders top is still below current prices, so maybe we still fall to hit that before a rebound. But, based on historical tendencies of the size and duration of this move we should be very close to a sharp rebound. See the chart for additional notes.
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In early July I had posted that the US Dollar Index may have completed a large downward correction ending with a contracting triangle. The move out of the triangle wasn't strong enough to confirm that though. Now we have the possibility again of a completed pattern with explosive upside to come in this index. This fits with what is going on and expected in commodities right now. We should see pressure downward in gold and silver very soon here I think. Also, the recent patterns suggested in the commodity indexes seem to be unfolding now, so don't look to jump into commodity funds long any time real soon for position traders.

I actually bought some UUP Sept. 21 calls today which should have no problem doubling in value before expiration if this projection is correct. UUP is such a slow moving instrument in absolute value terms that I don't ever trade it, but the liquidity is good, so the options make a good vehicle at major turns.

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Even if the gold trend is still up, prices have hit up against a longer term resistance line, so there should be a pullback here toward the green uptrend line at least. The next chart shows the shorter term picture with a bearish reversal today.

As a side note, while gold has trended upward with stocks for most of this bull market, it traded inversely to stocks most of the last bear market. It gets used as a crisis hedge investment often times. So, we may be at a point here where gold starts to trade inversely to stocks. I really don't have any solid expectations on this, but just understand that the recent correlation can change and may be at a perfect time to do so, as the market moves from inflationary fears, to more deflationary fears if stocks and commodities trend down as the patterns are suggesting right now.
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See chart for notes. Silver is actually a good short or put option buy (Oct expiration) here in my opinion. We should see continued pressure here. I will post a trade on it ASAP. The reward to risk ratio is not as good here as it was on the last entry, but this is what the market is giving, and it still should be pretty good.

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