A financial blog on investing in stocks, commodities and the gold bull market.
Sunday, July 27, 2008
Is it time for the dollar to rally?
When everyone starts thinking the same thing then usually no one is thinking. The dollar has gotten pummeled over the last 2 1/2 years. The Fed debasing the currency has led to the dollars decline and commodity prices skyrocketing.
Now don't get me wrong I'm still a long term bear on the dollar but I think too many investors are short the dollar at this point. Everyone has been thinking the same thing for a while now. It's probably time for the second counter trend rally. Note the 3 month basing action that we've been in similar to how the first counter trend rally started. This is probably a sign that the market is running out of sellers. If there's no one left to sell then the direction of least resistance is going to be up.
The first rally lasted a year. There's no reason why it can't do so this time also. As a matter of fact I suspect it will. The FED has to have noted the explosion in commodity prices as a result of their last attempt at devaluing the dollar. I think they are going to be a bit reluctant to expand money supply for a while. Of course if money supply is not expanding we probably can't expect too much out of the stock market. The S&P was up a grand total of 3% in 05 as the dollar rallied.
Since we are in a bear market now I expect the market to gradually work lower as liquidity contracts. At some point probably by the middle of next year the FED will start to panic again as the recession doesn't improve and most likely continues to deepen. Falling commodity prices should at that time give them the cover they need to start cutting rates again and expanding the money supply.
Until that happens I don't expect too much out of the precious metal or any commodity sector for that matter. Looking at the weekly charts of GLD and the GDX it's obvious that money flows have been diverging for a while.
Another clue is our strong partner Platinum is now breaking down. Platinum has been the leader during this bull market. It's now leading the metals lower.
I don't think for a minute that the dollar bear is over or the precious metal bull for that matter. We are just going through the normal counter trend moves that happen in all bull & bear markets.
Luckily for us, all we have to do is watch the gold and silver COT for signs that the commercials are covering their huge short positions. Once we get the big money back on our side it will be time to buy the metals aggressively again and short the dollar. Until that time we'll just have to be patient.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such positions.