If you have been following our commentaries, you know that in the latest one we emphasized the fact that the dollar has not broken down decisively from its trend channel, which therefore remains up. This has changed in the recent days, so we are sending you a Market Update, in which we will tell you how we are going to deal with this situation.
As stated above, USD has broken down from the uptrend channel and has now stopped at its previous low of 83.10. USD closed below that trend line for 5 trading days, so this breakdown is confirmed. However, please note that the previous September decline, it was the 50-day MA that stopped it. This time we are below it, but THIS breakdown is not fully confirmed. The general interpretation of this situation breaks down to this we either go up with a vengeance or we experience a small pullback and then plunge. Basing solely on the technical analysis, the latter situation is a little more probable. However, generally, it is unclear and we therefore need to look for other clues.
This time we believe the key factors are the main stock indices of the worlds leading economies. The three-month trend lines have been broken and tested during previous several days. DJIA, SPX, DAX, FTSE, and Shanghai Stock Exchange have all broken above their trend lines and have now tested this breakout. NIKKEI broken out several days earlier. This normally indicates that a strong move to the upside is coming, however right now this could be misleading.
The banking index did not break out. Conversely, it touched the resistance line and then declined. Since it was the financials that were the first to fall at the beginning of this massive plunge, we can expect them to lead the upswing as well.
The performance of the precious metals stocks is also mixed. The precious metals stocks (HUI) have just touched their both long- and short term resistance level, which means that they are likely to move rapidly, once the direction is established. Breaking above the support line should trigger a sizeable rally, but if HUI fails to break it, it could fall even more rapidly.
The latter is probable especially given the characteristics of the recent rally in gold. If you compare the performance of GLD in the recent days to the rally preceding the Oct 8-th top, you will see that the similarity is striking. This would imply that we can get much lower very fast.
Combining all of the above gives us the following conclusion: we are on the verge of a strong move in the gold stocks either up or down. All that is needed is a key event in one of the following markets: gold or the general stocks market. If the stock markets around the world plunge, we might see more of what we have witnessed in the past declining prices of stocks and commodities, investment funds raising cash to meet the margin calls, and rising value of the USD Index, as many entities still view the dollar as the safe haven.
This is confirmed by the indicators that we developed exclusively for the precious metals sector. Please take a look here:
http://www.sunshineprofits.com/files/images/email_dec132008.png
Once both indicators are above the dashed line we have a high probability that the top is being or has just been formed. On the other hand, if they are both below the lower dashed line, the bottom is most likely being formed. Usually, it is the black line that signals the top/bottom and the orange one confirms it. It is not designed to catch every top/bottom, but rather to indicate, which moments have higher probability to be one.
This and more tools will be available to you in our Premium Service (coming soon!)
Once we get the confirmation, this model will suggest that the top is either in or we are very close to one. If the HUI goes down soon, we will get this confirmation. This corresponds to the points raised earlier that we are at the critical point in the gold stocks and if the HUI Index fails to break the resistance level, we may witness a rapid decline.
We decided to open a very small speculative position, which should prove profitable if the decline is indeed rapid. We bought short-term puts on FCX and AEM, which both tend to fall in a volatile manner (all other things equal, the more volatile a stock gets, the higher the options price goes).
Although the situation seems symmetrical to the upside and to the downside, it is not. We believe that if we go down from here, we will go down very fast, and this is what we bet on by purchasing these options.
If you decide to follow us on this trade, please make sure that you use just a little amount of your capital.
Back
As stated above, USD has broken down from the uptrend channel and has now stopped at its previous low of 83.10. USD closed below that trend line for 5 trading days, so this breakdown is confirmed. However, please note that the previous September decline, it was the 50-day MA that stopped it. This time we are below it, but THIS breakdown is not fully confirmed. The general interpretation of this situation breaks down to this we either go up with a vengeance or we experience a small pullback and then plunge. Basing solely on the technical analysis, the latter situation is a little more probable. However, generally, it is unclear and we therefore need to look for other clues.
This time we believe the key factors are the main stock indices of the worlds leading economies. The three-month trend lines have been broken and tested during previous several days. DJIA, SPX, DAX, FTSE, and Shanghai Stock Exchange have all broken above their trend lines and have now tested this breakout. NIKKEI broken out several days earlier. This normally indicates that a strong move to the upside is coming, however right now this could be misleading.
The banking index did not break out. Conversely, it touched the resistance line and then declined. Since it was the financials that were the first to fall at the beginning of this massive plunge, we can expect them to lead the upswing as well.
The performance of the precious metals stocks is also mixed. The precious metals stocks (HUI) have just touched their both long- and short term resistance level, which means that they are likely to move rapidly, once the direction is established. Breaking above the support line should trigger a sizeable rally, but if HUI fails to break it, it could fall even more rapidly.
The latter is probable especially given the characteristics of the recent rally in gold. If you compare the performance of GLD in the recent days to the rally preceding the Oct 8-th top, you will see that the similarity is striking. This would imply that we can get much lower very fast.
Combining all of the above gives us the following conclusion: we are on the verge of a strong move in the gold stocks either up or down. All that is needed is a key event in one of the following markets: gold or the general stocks market. If the stock markets around the world plunge, we might see more of what we have witnessed in the past declining prices of stocks and commodities, investment funds raising cash to meet the margin calls, and rising value of the USD Index, as many entities still view the dollar as the safe haven.
This is confirmed by the indicators that we developed exclusively for the precious metals sector. Please take a look here:
http://www.sunshineprofits.com/files/images/email_dec132008.png
Once both indicators are above the dashed line we have a high probability that the top is being or has just been formed. On the other hand, if they are both below the lower dashed line, the bottom is most likely being formed. Usually, it is the black line that signals the top/bottom and the orange one confirms it. It is not designed to catch every top/bottom, but rather to indicate, which moments have higher probability to be one.
This and more tools will be available to you in our Premium Service (coming soon!)
Once we get the confirmation, this model will suggest that the top is either in or we are very close to one. If the HUI goes down soon, we will get this confirmation. This corresponds to the points raised earlier that we are at the critical point in the gold stocks and if the HUI Index fails to break the resistance level, we may witness a rapid decline.
We decided to open a very small speculative position, which should prove profitable if the decline is indeed rapid. We bought short-term puts on FCX and AEM, which both tend to fall in a volatile manner (all other things equal, the more volatile a stock gets, the higher the options price goes).
Although the situation seems symmetrical to the upside and to the downside, it is not. We believe that if we go down from here, we will go down very fast, and this is what we bet on by purchasing these options.
If you decide to follow us on this trade, please make sure that you use just a little amount of your capital.
