The Rising US Dollar Effects

The US dollar reversed its decline and gathering strengths. Looking at the DXY (US dollar index) chart, this index could be heading toward 81.75 from the recent low near 70.50.

Conversely, the Euro started to decline from its recent high 130.13 toward the 127 level. If it fails to hold 127, it could fall to the previous pivot low near 125.90.

Similarly, the price of crude will fall as the US dollar rise. From the chart for the crude ETF, USO could drop to 29.50, where the spot price for light crude will be near 78 per barrel.

Finally, the price of gold could also fall along with other commodities prices. The ETF for gold, GLD could drop to 162 that mean gold could be less than 1680 per ounce. If it cannot hold the 1680 per ounce, it could drop to 1620 per ounce or near 157.50 for GLD.

Happy New Year!

The first week of trading in 2010 was quite interesting with all those data watchers (the media talking heads) focused on the job report. A big deal was made on the widely anticipated positive job report last Friday, and it turns out to be a loss of 85,000 jobs. Based on the market’s reaction, it didn’t turn out to be such a big event as the talking heads made it to be. The market just keeps on crawling higher. The SP500 finally hit the measured move of the bull flag formed back in July 2009. The market appears to continue its bullish stance with sector rotation to provide the needed leadership. During the period in November and December 2009, the financial sector was weak. And at the end of the year, the financial started to show sign of reversing, and the first week of 2010, the financial was one of the strong sectors along with the energy sector that provided the catalyst for the first week's gains.

Here is an updated chart for the SP500:



As the economy struggle along, 2010 will be a year for dollar watching. Here is the chart for the dollar index, DXY, the ETF on the dollar/Euro, FXE, and the dollar ETF, UUP. Click on the chart to get a larger view and to read the commentary.

DXY



FXE



UUP



Here is a brief look at gold ETF, GLD.

GLD

What A Difference A Day Make

After putting gold back on a trade watch for the next upward move, the market sold it off with a drop of more than $28. Since the gold ETF dipped below the 108 support level, I will wait for the next sign from gold to tell me it is ready to resume its upward move. For now, the long entry that I was watching is off the table. The catalysts I have mentioned could still be played out in the near future. I will continue to watch for signs on which catalyst will emerge or for signs of any new catalyst for gold to move higher.

GLD




As the recent price actions from the US dollar telling us its imminent resurgence, the momentum took a leap forward and broke some major resistance today. Most of today’s drop in the price of gold was due to the strength in the dollar.

DXY



UUP



The Euro took a hit from the dollar, the Euro-dollar ETF, FXE, went below the 144 support level. If the dollar continue to regain its strength (which seem to be most likely at this point), then the unwinding of those dollar carry trades will start to accelerate.

FXE





I have mentioned the weakness in the financial sector previously, and I am continuing to be cautious on the financials. Take a look at the time frame when WFC and BAC did their secondary offering. Don’t get fooled by the false move. Their stock prices were being held up to move those papers. If one look closely at the financials, one can detect the underneath weakness in the sector. I’m staying away on buying the financials.

WFC

Gold & The Dollar Moving Up Together?

Continuing my observation on the US dollar and the carry trades, a slight twist has started to appear that could confuse some casual market observers. Previously I have talked about how the weak US dollar propelled the stock market, the price of oil and the price of gold. Now I’m seeing gold could be making another move upward at the same time as the dollar continues to regain its strength. This seems to contradict the weak dollar, higher commodities prices, and the strong dollar, lower commodities prices scenario.

But did you recall what I wrote back on November 16 about where the price of gold could reach? I stated in that post in order for gold to reach the next level near $1300, it will be a different catalyst other than the weak dollar. And I believe this trend change for the dollar and the price of gold to move up together is due to a new catalyst. This catalyst could be the resurgence concern on the long term inflation due to the massive liquidity the Fed has injected into market and the possible early rate hike from the Fed, or a short term catalyst like the possible preemptive military strike on Iran to remove the threat of Iran developing nuclear weapons. These possible catalysts could cause the dollar and the price of gold to move up in unison. And yes, short term, the price of oil could spike up as well due to possible short term interruption of the oil supply from the possible military action. In regardless which scenario is at play, from the price action of the dollar and the price of gold, they are definitely appear to be moving to a higher level.

Here are the latest charts with my commentary. Click on them to get a larger view.

GLD



DXY



UUP



FXE

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.