Continue To Watch The US Dollar

It was another week of sideway trading for the market. The weakness from the financial and energy sectors is being compensated by the strength from the tech, industrial and consumer discretionary sectors. Until this balance of power is changed, I am expecting more sideway actions to continue for the market. The catalyst that can alter the current balance of power is the US dollar.

As the dollar gains strength, those dollar carry trades will be unwounded and that will bring to the end of this round of musical chair. To monitor the movement of the dollar, I have put up the following charts with key levels identified for potential breakout. In addition, I have also taken a closer look at the financial. It appears something might be developing that could cause a major break for the market. Whatever that might be, only time will tell. For now, one might take a look at some individual stocks in this sector, i.e. GS, WFC, JEF, JPM, MS, and BAC, to get a sense of the developing weakness in this sector. I will post more about the financial and some possible scenarios to watch for 2010. In the meantime, here are the charts. Click on them to get a larger view of the chart.

DXY



UUP



FXE



OIH



USO



GLD



XLF

The Return Of The US Dollar

This is my first post since my return from the Far East. Looks like the market still sitting around where it was 2 weeks ago before I left for the trip. The market did not experience any major changes in its technical. The DJI encountered resistance when it reached the weekly bull flag measured move level of 10,500, and the SP500 still unable to move to 1150 level. But the buzz in the market is beginning to change. As we’re all aware the recent rally is fueled by the weak dollar, causing oil, gold and equities to rise. This dollar carry trade has reached a point that is causing lot of anxieties for many traders due to the recent sign of the US dollar regaining some strength.

Since I am still in the process of getting myself back into the rhythm of the market, rather than repeating what I have posted 2 weeks ago, I decided to take this opportunity to talk about the US dollar and some of the dollar vs. other currency ETFs for possible trade opportunities and/or for monitoring the unwinding of the dollar carry trades that could signal the stock market reversal or next rally.

The following chart is the DXY, a US dollar index. Since late September, a divergence between the price and the MACD has developed, and recently price of this index broke above a downtrend resistance. These two technical observations presented a first sign that the US dollar could be reversing back toward the upside (strong US dollar).



Here is the chart of an ETF that track the US dollar, UUP. It too shows the same technical sign.



Here is an ETF that track the US dollar vs. the Euro. Look at the divergence it has developed between the price of the index and its MACD since late September, and the recent break down below the upward supporting trend line. This is another indication the dollar is strengthen.



Last chart is the dollar vs. the yen. This index has been trading within an upward price channel. It too appears to be heading back toward the upper price channel.



All these charts show the US dollar is gaining strength recently. If it continues to gain strength and move against the Euro and the Yen, the unwinding of the dollar carry trades can be vicious and volatile since the cheap dollar have created a very crowded one sided position, and when everyone is heading out the door, lot of people will be trampled on the unwinding. If one is looking for trading opportunities when the dollar carry trades are being unwound, consider these ETF that short the market index; DOG for shorting the DJI, SH for shorting the SP500, PSQ for shorting the Nasdaq 100, and the RWM for shorting the Russell 2000. I wouldn’t trade the ultra-short ETF (those 2X or 3X) of the respective market index due to the compounding effect. Stick with the 1X short ETF. Even if I’m not trading these short ETF, I will monitor these dollar/currency ETF for possible sign of the imminent dollar carry trade unwinding.

Where Is Gold Going?

I was asked where do I see gold will be heading. Looking at the inverted head and shoulder pattern that took more than a year to develop, the measured move for the gold ETF, GLD is in the 131 region. This translate to gold prices above 1300 an ounce. I have been hearing some talking head projecting 1400 an ounce. So we'll see. I don't believe the weak US dollar will carry gold to the 1300 level. It will most likely be some other catalyst to move gold up to the 1300 level and above.

GLD: