Ascending Triangle

The dollar is setting up an ascending triangle, this is a bullish chart pattern, but first we would need to see price come down and test the uptrend line. This could really be a text book setup; if we get a pullback to the uptrend line on down trending volume we could witness a big move in the dollar. Once we get a price break of the horizontal resistance two things should happen (1) volume will break the down trend and we will see a big volume day (2) price has a high probability of retracing back to the top if the pattern, then lifting. If this turns out to be true risk assets are going to be taken to the wood shed.

Bring the Pain…

On Friday the big market concern is over the steep rise in the dollar and the rise in the equity market. The reasoning behind the rise in the dollar is due to the better then expected unemployment number. For most people this is not a good correlation, especially for commodities prices. Companies that consume industrial metals or energy to run their business are going to be effected. I think that even the precious metals will get hit the hardest because of the opposite effect a strong dollar will do. But also because I think that most of the precious metals are extremely over bought, and when people start looking for the exit we will get fast covering and locking in profits.

Below is a chart of the dollar index, and of lately we have broken out of the wedge pattern that we have been in for quite some time. We are also approaching and resting on the resistance side of the 50 day moving average. If we break the 50 day moving average and close above, we could see a counter trend rally back in to the 80’s. If you take a look at the volume on Friday, you can see all the short covering that went on. I feel like the bears capitulated on the biggest volume I’ve seen on the $DX. We could be in for a bumpy ride as this carry trade starts to unwind.

Now if we do have a counter trend rally equity and commodity markets are going to be heavily effected in a negative way. I will be getting long Vega on any opportunity, and I will continue to manage my risk with my other positions.

Volatility

Today I will be taking profits on my short puts that I set about a week ago.

In my opinion I think that volatility levels are now back at the bottom of the range. Now is the time to start adding to a long vega positions. I set $RUT calendar spreads yesterday to get some vega exposure. Now the $VIX is at about $22.10 and price could get as low as 20 again and that is alright, but if you want to start looking at long vega positions now is a great time.

There are a few other things that make me feel vol could pop over the next week. The first is the dollar, the greenback is closing in on the bottom of the wedge pattern. The closer the dollar gets to that level the higher the probability of going higher. Also the double top at 1100 is going to effect the vol levels as people will start to buy protective puts just in case we sell off from 1100. With 1100 in the cross hairs the anticipation of a pullback is ever growing.

To recap: Bullish on volatility, slightly bullish to neutral on the dollar, and I think a slight pullback in equity is in order maybe to 1075-1080.

SPX

The last couple of days the SPX has been in my opinion turning. Every time we made a turn in the market the market started to produce small body candles and long wicks. Sideways action is also a key component to this pattern, so it might take a few days for this pattern to play out.

The dollar is a big discussions out there right now, and I think that it is more important then ever. Its important to my trading whether I’m trading wheat or corn futures or trying to predict market direction. Right now I think that the dollar has more down side, with little or no support till 75.10.

I also think that gold has had too big of a move to the upside and should be either shorted via GLD or a long put spread should be set. The candle that formed yesterday on the GLD is very bearish. If you are long GLD you need to have your eyes peeled and keep a tight trail stop on your position.

To recap my thoughts; I’m bullish equity and bearish on the dollar.