US Dollar Index Holding Strong

Nov 10, 2008: 11:49 AM CST

To the surprise of many, the US Dollar Index – once feared to be in a hopeless downtrend – has resurfaced to new life and is forming a potentially bullish continuation pattern on strong technical strength.  Let’s look at the daily chart to see these developments.

US Dollar Index:  Daily Chart

Price bottomed in July on a mini-positive momentum divergence before breaking above both the 20 and 50 day EMAs, surviving a ‘confluence support test,’ and then reawakening into a strong upwards move which has shown considerable and surprising technical (price) strength and resiliency.

Price has formed a series of new momentum highs, the most recent of which was confirmed by a new price high in late October prior to our current pullback to support at the rising 20 day EMA.  The EMA is holding as support currently, and price is forming a potential bullish continuation, symmetrical triangle, which would be confirmed by a break above the $87.00 index value level.

A break below $84.00 would invalidate the pattern and would set-up a likely test of the rising 50 day EMA around $82.00.

One has to wonder, “How far will the US Dollar Index go up and how low will certain commodities go?”  Keep that in mind when interpreting these charts, as Crude Oil is trading near $60 per barrel (after challenging $150 per barrel highs) while gold is trading near $730 per ounce (after challenging $1,000 per ounce highs).

In terms of the weekly chart, the US Dollar Index is holding strongly above all averages, and we can see just how impressive the recent rally is in the larger picture:

Momentum has been steadily trending upwards, and price ’survived’ a significant moving average confluence ‘test’ in September.

Let’s continue to watch these developments for signs of continuation or weakness, and observe how a stronger dollar plays out in other markets and certain stocks (generally, a strong dollar hurts large, multinational companies based in the US).

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Goldman Sachs Triangulates to New Lows on Positive Divergence

Nov 9, 2008: 10:44 PM CST

Financial Giant turned bank Goldman Sachs (GS) formed a fresh five-year closing low on an interesting triple-swing positive divergence on the daily time frame.  Let’s view this development as well as a monthly chart spanning back to 2001.

Goldman Sachs (GS) Daily:

Goldman had strong support about the $155 level, but once that broke cleanly to the downside in September 2008, all bullish bets were off as price entered a steep move to the downside, complete with multiple violent up and down swings in price.  We closed at fresh lows Friday, but there’s a little bullish news worth discussing regarding this stock.

Goldman Sachs has set-up a rare, triple swing positive momentum divergence with the recent close, which could put a slight damper on further downside action.  Notice how the momentum oscillator trends upwards as price trends downwards.  The oscillator also made a new swing high in late October that eclipsed the earlier October high, while price made a lower high – also a positive divergence.

Generally, divergences by themselves are not reason enough to enter an aggressively bullish position, but they’re certainly reason to tighten up or perhaps consider exiting short positions (or long puts perhaps).  As you’ve seen in the past two months, Goldman has a tendency to snap back (to the upside) quickly, leaving short-sellers in the dust.

The most recent “snap-back” that resulted in a momentum divergence was near October 13th, where price surged from an intraday low beneath $80 to an intraday swing high just shy of $130 for a $50 move in three short days.

That being said, note that the moving averages are in the ‘most bearish orientation possible,’ and ideally we would not prefer getting ‘long’ until price closed above one or both of these averages, or they completed a ‘bullish’ crossover.

Let’s pull the perspective back to the Monthly chart to see just how far Goldman has fallen so quickly.

Goldman Sachs (GS) Monthly:

What took five years to build, sellers have managed to destroy in roughly one year – such is the nature of bear markets.  They can destroy gains much quicker than they were earned.  Take a look at other financial or homebuilder stocks for further examples.

Price reached a high just shy of $250 per share and have now closed under $80 in one year, destroying shareholder equity positions in the process.  Notice also how volume surged to significant highs during the ‘down-draft’ we’ve recently experienced.

Capital preservation needs to remain the #1 goal, and that might mean missing a bottom at times – but these markets have claimed many victims, and many more could be in store for the non-vigilant among us.

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Weekend Linking In

Nov 9, 2008: 5:44 PM CST

With another week behind us, let’s take a look at some key insightful blog or financial posts courtesy Newsflashr’s Blog and Business pages.

Dr. Brett Steenbarger at TraderFeed writes Learning to Trade: Viewing Yourself, Reviewing Your Trading as well as Learning to Win at Trading by Learning to Lose provide insights into the psychological world of trading methods.

Barry Ritholtz (The Big Picture) asks with comic genius, “Is this the Bottom?

Stock Trading to Go takes us through a chart of the 1930s and describes “Understanding Bear Market Price Swings Through History“.

Bill Luby at VIX and More shows a chart of VIX Jumps 10% on Consecutive Days that takes the Dow back to 1990 as he writes, “From a market timing perspective, the history of consecutive double digit jumps in the VIX does show a significant bullish bias going forward, but not one that develops until after the first day.”

Rob Hanna at Quantifiable Edges runs TradeStation statistics in “Down Another 5% – History Being Made Again.”  He states, “There have been 4 times that the Dow dropped 5% or more 2 days in a row. They were all between 1929 and 1933.”

Chris Perruna argues that Follow-through [is] not Likely.

The Site “Gaming the Market” focuses on informational posts that reveal possible market manipulation across multiple tactics, and always has great posts that are well-documented.

Declan Fallond notes that the First bottom test: S&P 900 key.

Feel free to send me links you find valuable for inclusion into possible future link posts.

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Inside a Volume Divergence

Nov 8, 2008: 12:02 PM CST

Much has been made about the recent rally into resistance on lower volume, and the subsequent sharp correction following Tuesday’s election.  Let’s step inside this situation for clues on how volume could have helped you anticipate a reversal… or at least suspected that ‘things weren’t quite right’ with the recent rally.

Let’s step inside the Dow Jones Index on the 30 min chart:

Price began a large momentum burst on October 28 which was a counter-trend rally that lasted until November 4th, taking the DIA from $83 to $96 – a large jump – in a matter of days.

What was volume saying to us at that time?  Volume – participation – was NOT confirming these higher prices, as you can see each day’s activity slowly trailed off until reaching a low on November 3rd, one day before the swing high in price appeared.  A negative momentum divergence also accompanied higher prices, which was a further non-confirmation of bullish strength.

As price broke the 20 and then 50 period Exponential Moving Averages, volume began to trend higher as price began its down-swing to the $87 level.  The green arrow represents incresing volume on declining prices, which serves as a ‘confirmation,’ or more specifically, volume was increasing in the direction of the price movement.

A “non-confirmation” by volume occurs when volume is declining in the direction of price movement.  It’s not so much an “up or down” thing, but moreso “is the volume trend rising and falling, and what might that say about the possible future direction?”

Generally, in a strong up-trend, we would expect volume to be rising as well as price travels higher which indicates that more people/funds are participating, increasing demand and pushing price higher.  We would like to see volume decline on sell-offs (counter-swings down) because this would serve as a “non-confirmation” of lower prices, or that people were willing to hold shares and not actively distribute them.

The same is true in a down-trend, in terms of we want to see the volume trend rising as price is making new lows, which serves as a confirmation of these new lows and then trend lower as price rallies in a counter-trend fashion, as the above example shows.

In short, we expect “Volume Goes with the Trend” to the be default expectation, though we’re not always granted this luxury.

The take-away from this example is that price was structurally in a counter-trend rally up on subsequently declining volume, combined with a negative momentum divergence.  That, combined with other analysis, was reason to doubt the short-term sustainability of the higher prices, and caused a higher probability of a downward price move coming.

Volume is only a piece of the puzzle, and by no means can any one piece give an accurate picture in isolation.

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New Hewison Video: Where is the Bottom in Crude Oil

Nov 7, 2008: 10:41 AM CST

Just a day after I asked the same question, Adam Hewison of the Market Club released a nine-minute video and analysis of crude oil and explained their trading signals as well as tactics for trading with the recent trend that are of great interest.

The video is entitled:  “Where is the Bottom in Crude Oil” and is made available free to readers here, as well as a portion of the text copied with permission (as a commissioned affiliate).

Let Adam interpret the proprietary trade signals via their Market Club “Trade Triangle” technology and let him walk you through this chart step-by-step:

Hewison writes:

“I’m sure as a trader you’ve heard the expression, the “trend is your friend.” That was never more true than today as crude oil (NYMEX_CL) crashed to new lows and the stock market resumed its downward trend.

Today we are focusing on crude oil and the reason why it fell to new lows. We’re also going to be looking at all of the “Trade Triangle” signals that we have received on crude oil since last July. The video is about nine minutes long and I highly recommend you watch it, simply because it shows you just how powerful trends can be.

The video also shows you why price action is more important than fundamentals. If you have a few minutes, please take the time to watch the video and learn how the markets really work.

Since Barack Obama was named President elect, we can see how the markets have reacted at least in the short-term. Maybe not a reflection of Obama’s potential as a president, maybe a reality check for problems in the economy. Not even the record cut in interest rates by the UK could help the markets today.”

He demonstrates the six weekly trading signals since July, of which four yielded good profits with two losing trades that yielded small losses.

Perfect timing on Adam’s part!  View my post “Just How Low can Crude Oil Go?” for my previous analysis. Continue Reading…

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