Gold/Dollar Play is Getting Extreme

A lot of what is driving the recent stock market and commodity rally can be attributed to the plummeting Dollar. To some degree the rally in Gold (GLD) is almost getting parabolic in nature. While we've been longer-term bullish on Gold for some time, such a strong uptrend becomes more and more likely to break down sharply. Feel free to ride up such a strong uptrend, but take profits quickly and be prepared to jump on the bearish side should it break down -- because it will correct sharply and quickly when it does.

Take a look below at the recent very strong inverse correlation between GLD (yellow) and the Dollar ETF (UUP, green). When/if this does break down a bit with the Dollar rallying and Gold selling off, option traders can consider a Long UUP, Short GLD paired trade strategy. But don't jump in front of this runaway train yet.

And wherefore the Dollar, which more and more seems to be the main driver of the recent big rally in many commodities and strenght in stocks. Using the US Dollar Index (DXY), which goes back 30 years+, you can see below that we've reached the lowest levels ever since the economic crisis occurred. As I've mentioned previously, a weak currency is NOT good for a country and its economy over the long-term (although some make the argument that it does boost the power of our exports). Buying power and wealth of Americans are badly hurt when foreign good become more relatively expensive and inflation raises the prices of basic commodities. And think about it from a traveler's perspective ... if you travel to a country with a very poor exchange rate, making it basically dirt cheap to go there ... what do you equate that with? A third world or emerging economy, basically. Not good for the once strong USA, in my view.

So where can the Dollar bottom out? Well, looking at the DXY Weekly Chart below, you can see we're in a pretty steep downtrend, so don't fade this just yet. Notice that the recent downtrend began when we failed at the same top that was resistance in late 2008 and early 2009. We are fast approaching the area where the DXY bottomed in late 2009, and beyond that lies the significant lows of the 2008 panic.

Bottom line: The Dollar and its various ETFs and Indexes are in a free fall, so don't jump in front of a falling knife. This is contributing to strong rallies in Gold and other commodities and also helping push stocks higher to some degree. These types of parabolic trends in Dollar and Gold will tend to steepen and steepen until it breaks down sharply, right at the top (or bottom) when the biggest greed of an "easy trade" comes in. So ride these trends while they last, but limit exposure and take profits quickly, when these end they usually reverse hard and rapidly, and jump on the other side for profits in both directions from option trading.

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SP500 Pierces, Bonds Rally, Dollars Fall Out the Window

From Chris Vermeulen at The Gold And Oil Guy.Com.......

It’s been a wild ride the past few days OptionsX, Obama and FOMC comments. Seems like everyone is waiting to see what the market is going to do going forward at this pivotal point…

Since the market topped in April and has since been trading sideways in this rather large range, everyone has small positions at work but waiting for a decisive move before fully committing to one side. There could be a few opportunities in the coming days using bonds, the dollar and the SP500 if all goes well which I explain below.

Lets take a look at the charts.....

SP500 – SPY ETF, Daily Chart
There has been a lot of talk about a sharp rally if the SP500 could break the 1130 level or the neckline everyone is talking about. Well this week Obama was on TV and the market rallied into that, then again after. I don’t really thing investors or traders were buying things up as he said the same boring stuff he always says without anything new. I feel there could have been another force at work, which we can discus another time .

Anyways, the market pierced those resistance levels and I’m sure a ton of traders have switch their view on the market from bearish to bullish. While I prefer to trade with the trend I can’t help but feel this market is still range bound, which is why I am still bearish at these shakeout levels. The SP500 did break resistance BUT the following candle did not close above the breakout candles high to confirm the move.

That said, the market is now trading back down at support and the next couple of days I’m sure will shed some like on the direction.

20 Year Bonds – TLT Fund, Daily Chart
We have seen the bond price pullback in a bull flag formation. It touched support before bouncing to break short term resistance as it looks to have started another rally. The chart below overlays both the candlesticks of the bond price and the SP500 which is the white line. You will notice they have an inverse relationship. If bond prices continue to rally then lower SP500 could start to rollover.

US Dollar – UUP Fund, Daily Chart
The dollar has fallen sharply the past 10 trading session and it looks to be oversold for a couple reasons. The past couple days the price has dropped straight down and gapped lower. This recent drop has reached a gap window which will act as support and could provide a tradable bounce in the coming days depending how things unfold.

In short, the SP500 is flirting with resistance and has yet to confirm the breakout. Bond prices look to be headed higher which will makes me think equities could start to sell off any day now… It’s also important to note that the big banks GS and JPM shares have been under pressure and they tend to lead the broad market. Another point to add is the fact the oil has not rallied even though the dollar dropped like a rock? What happens if the dollar bounces? Could oil finally start its next leg down?

Gold and silver continue their steady grind up. The price action reminds me of the 2009 Nov –Dec move. Once that train de-rails its going to have a sharp correction…

You can get my ETF and Commodity Trading Signals if you become a subscriber of my newsletter. These free reports will continue to come on a weekly basis; however, instead of covering 3-5 investments at a time, I’ll be covering only 1. Newsletter subscribers will be getting more analysis that’s actionable. I’ve also decided to add video analysis as it allows me toe get more into across to you quicker and is more educational, and I’ll be covering more of the market to include currencies, bonds and sectors. Before everyone’s emails were answered personally, but now my focus is on building a strong group of traders and they will receive direct personal responses regarding trade ideas and analysis going forward.

Let the volatility and volume return!

Chris Vermeulen....The Gold And Oil Guy.Com

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