Sunday, December 6, 2009

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.

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