Category Archives: FOREX

Yes, the U.S. Dollar is at a Critical Juncture

If you have read any of my pieces lately you are already aware that as it relates to the financial markets a lot of things are presently at a critical juncture (including my sanity, but I digress).  Today let’s add the U.S. Dollar to that seemingly ever longer list of financial areas that appear to be at a crossroads.  And this one has some large implications simply because a lot of other markets are affected at least to some extent by what happens in the dollar.

Figure 1 displays the Spot U.S. Dollar on a monthly basis.


Figure 1 – U.S. Dollar Monthly (Courtesy ProfitSource by HUBB)

The reality is that there is no one definitive price at which to draw a “definitive” line in the sand.  So I arbitrarily picked two.  There is nothing “magical” about these two lines and a move above or below either does not technically “prove” anything.  Still, as far as this range goes, a lot of previous price moves have “gone here to die” so to speak.

Now this is the point in the article where a skilled analyst would explain in painstaking detail why the dollar is absolutely, positively destined to move higher (or lower) from here.  Sorry, folks I honestly don’t know. But there are two things I do know which might still prove useful:

1) For every prognosticator out there pounding the table that the dollar is sure to move higher there is another (equally slightly crazed) prognosticator averring that the dollar is destined to decline.  And the key thing to note is that they both can make a pretty compelling case.

2) A lot rides on which way the dollar goes from here, because there is no shortage of markets that react – at least in part – to the movements of the U.S. dollar.  This means that alot of trading opportunities will be affected/created by the next big move from the dollar.

A few examples appear in Figure 2 below which displays the inverse nature of the correlation between the U.S. Dollar (using ticker UUP as a proxy) and the market in question (for the record, a figure of 1000 means the market moves exactly like the dollar and a figure of -1000 means the market moves exactly inversely to the dollar).


Figure 2 – Correlations to U.S. Dollar (Courtesy AIQ TradingExpert)

Now the fact that foreign currencies (ticker FXE – which tracks the Euro) move inversely to the U.S. Dollar is fairly obvious.  But note that on this list are:

*Foreign Bonds and U.S. Bonds (BWX and TLT)

*Precious Metals (GLD and SLV)

*Commodities (like coffee, soybeans and crude oil)

*Broad Commodity Indexes (DBC and GSG)

This encompasses a pretty darn wide swath of the trading world.  And every single one of them will be influenced to some extent by which way the dollar goes from here.

As you can see in Figures 3 through 6 (click to enlarge any of the charts), what happens to the U.S. Dollar can matter a lot to what happens in these markets.


Figure 3 – Dollar vs. Euro (Courtesy AIQ TradingExpert)


Figure 4 – Dollar vs. Bonds (Courtesy AIQ TradingExpert)


Figure 5 – Dollar vs. Metals (Courtesy AIQ TradingExpert)


Figure 6 – Dollar vs. Commodity Indexes (Courtesy AIQ TradingExpert)


So the bottom line is that I do not know which way the dollar goes from here.  But I do know that whichever way it goes a lot of “things” will likely go “the other way.”  And everything listed in Figure 2 represents a lot of trading opportunities.

This represents a good time to invoke:

Jay’s Trading Maxim #17: (with credit given to George and Tom at Optionetics back in the day): Investing success involves two “simple” steps. #1) Spot opportunity.  #2) Exploit opportunity.  Everything you do as a trader or investor falls into one of these two categories.

A bunch of opportunities may soon be spotted (assuming the dollar actually ever does get around to deciding which way it wants to go…).

So focus here, people, focus…

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

One of the things …….. is that the U.K. is not in great financial shape right now – comments June 21, 2016

The Dow shot up over 270 points at the open, then spent the rest of the day giving back about half of those points to close up 130 at 17,805.  Volume was moderate, coming in at 96 percent of its 10-day average.  There were 178 new highs and only 9 new lows.

Yesterday’s rally was the Big Move predicted by last Thursday’s small change in the A-D oscillator.  It also came on the heels of last Wednesday’s VIX Buy Signal.
The rally was fueled by two polls released in the U.K. over the weekend that showed the ‘Stay’ vote taking a small lead. Prior polls had been showing the ‘Leave’ vote with a small lead, so the markets took the change in polling as a positive sign.  I wouldn’t get too excited about the polls, because the result of Thursday’s vote is still way too close to call, especially in view of the impact that a ‘Leave’ vote could have on financial markets.
One of the things that students should realize is that the U.K. is not in great financial shape right now.  The country is running significant account deficits and a lower pound won’t be that much help to British consumers and exporters.
In September 1992, when the UK last devalued its currency by 15 percent, the country was able to recover because interest rates had been running over 10 percent, so consumers and businesses benefited by the devalued pound which lowered interest rates.  But now with interest rates running near zero, a 10-15+ percent devaluation of the pound could have entirely different consequences.  It could severely impact the UK’s economy and put the country into a deep recession that could take years to recover.
So we need to be on our toes going into Thursday’s vote.  If the ‘Leave’ voters win, Friday could be a very bad day for world markets.  On the other hand, IF the ‘Stay’ voters get the upper hand, world markets should react positively with the Dow likely to re-test the 20 April high of 18,168.
Please be careful going into Thursday.  In my opinion, the vote on Brexit is too close to call and could go either way.  This means that the risk to your portfolio is very high.
So because of the high risk, I am mostly focused on short-term scalps.  With a positive Dean’s List, a neutral Tide, and negative DMIs and Money Flow indicators, the cockpit indicators are about as mixed as they can be.  They’re telling me to be on the sidelines or scalp trade only.

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However, my custom VTI turned positive after yesterday’s trading, so I’m going to look for scalp trades to the long side today.  One of the things I’ve found is that whenever the VTI changes direction, stocks highlighted for the Honor Roll tend to do well over the short term.  We’ll see if this holds true today with BP and Continental Resources (CLR), the two energy stocks that were highlighted last night.
My other focus will be on gold.  Yesterday’s early rally in the equity markets caused most gold stocks to pull back.  It also caused UUP to drop off the Dean’s List and the UDN, inverse Dollar ETF, to re-appear. So for the very short term, the Dean is telling is us the Dollar is weakening, which means the environment for gold could be getting stronger.
Also, the 2-period RSI Wilder on ABX closed with an oversold reading of 22.17. So with ABX in an Uptrend (50>200) and an oversold RSI on the Daily chart, its telling me that it might be a good time to go hunting. I spent several hours last night polishing my Rifle)
That’s what I’m doing,
The Professor
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