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Gold & Currency. Powerful Trendline Action

Stewart Thomson
Sep 30, 2009

1. Mid Trading Week Day. The US dollar has broken upside from some key down trendlines (DTLs). I urged readers to buy the USD with a small amount of risk capital into the recent lows on weakness. The US currency has now surged to 77 on the index and is attempting to establish an uptrend channel on the intraday charts. There have been several previous attempts over the past 3 months to do the same thing, but all have failed. As of this morning, the latest attempt is also failing, although only on the intraday charts. Here's a look at one key upside break on a longer term chart. This is against the Canadian dollar via the USD/CAD ratio chart:

click to enlarge

2. Notice the RSI, the relative strength. I've drawn 3 blue arrows at the lows. Contrast that with price. In fact, look at all the blue arrows flashing either buy or near-buy signals across a multitude of technical indicators, while price has moved lower. Most important, notice the slight upside penetration of the major red supply line.

3. What does this mean? Answer: It means you want to get ready to start accumulating the Canadian currency should it begin an intermediate stage decline. Should the US dollar begin to strengthen against the resource currencies, and against gold, you must use that opportunity to buy gold and the resource currencies into that weakness. Don't guess the extent of the weakness, just buy into it.

4. I want to be net long the resource currencies with an up to 70% allocation to the long side, and up to 30% on the short side. 70% long built into price weakness, 30% short built into price strength.

5. There are some practical considerations. For instance, if you live in America, your home currency is the US dollar, so Canada is a lot closer to the USA than Australia is. One approach is to maintain some physical gold in Canada for safekeeping, along with some gold stocks, while focusing your currency bets on the Aussie dollar. Today the Aussie has made a new high and I woke up with my Aussie cash register jingling.

6. Many forex contracts are structured as USD/CAD and AUD/USD, meaning if you want to be long the CAD against the USD, you actually need to short the USD against the CAD on that forex contract. That may not be something everyone is comfortable doing, and shorting any item brings unlimited total risk. The AUD/USD is set up so the investor doesn't have to short anything, you simply buy the contract. You go long.

7. The ETFs FXC-NYSE and FXA-NYSE also allow you to be long either currency, both against the USD.

8. If you live in Australia or Canada, your home currency is already a resource currency, so you are already likely net long against the USD via many assets held in your home currency.

9. It's critical you focus on today's real world market tactics, not tomorrow's asset allocation fantasies. Look at the USD/CAD. You can see the upside breakout by the USD, taking out a 2 year down trendline. Use this upside breakout to book profit on long USD positions, in stages, into USD strength. And begin buying CAD and AUD. This is the exact opposite of what nearly 100% of chartists will tell you. I sell only strength. No upside chart breakout is bought. All are sold. Profits are booked on long positions into strength. I was a buyer in to the USD/CAD 1.06 lows, a seller into the 1.09 highs on Friday, and a seller near the 1.10 area highs on Tuesday. Yesterday I was a buyer in the 1.08 area into weakness, and into the 1.07 area this morning.

10. Selling a major trendline upside breakout is one of the juiciest profits you can book, as the technicians pile in on the long side in a street fight to get on board. By dividing your long position into an inner core, outer core, and trading position, you can feel very confident that you're in complete control of the situation. You book profit on the trading position, but hold the core position for the bigger move indicated by the major trendline breakout.

11. Some of you may be a little confused. You look at the USD/CAD chart and say, "but this is a major upside breakout, shouldn't I be buying the USD here against the Canadian dollar?" Answer: You should have already bought it, systematically, into the massive weakness from 1.30 to 1.06. Maybe this is a legitimate upside USD breakout, maybe it isn't. Maybe the correction in gold has a long ways to go, maybe it's all over. You can't know the answer. Seeking it will harm you. Focus on a systematic response to price action.

12. Looking at the two year Australian dollar (AUD) chart, a breakdown below the 85.00 area would break it's major uptrendline. Such break could signal the beginning of an intermediate downtrend move against a rising US dollar. Regardless, the correct tactics are to BUY aud into any such trendline penetration. In my case, that buying to initiate longs. If you live in Australia, it may be to book profit on shorts you built into this massive strength. Notice the key red horizontal support at the 85 level.

click to enlarge

13. If you booked no profits on the $120 move in gold from 905 to 1025, and bought no US dollars on the multi-month tanking, you should not be trying to buy the USD on any "pop" during the day, nor bailing on gold, especially with large monies. Don't compound past tactical errors with more errors. You should be a buyer of gold here on weakness, and a booker of profit in the USD here on strength. Not the other way round.

14. Silver fell about $2 from the 17.70 dec futures high set only 2 weeks ago. Gold has fallen $40 from it's $1025 area high. In percentage terms, silver has fallen about 11%, gold about 4%. Don't focus on how high silver could go relative to gold. Focus on the fact it has tiny odds of going to zero. And focus on the fact it just dropped 11%. Did you buy any? I did. Now it has soared 75 cents off the lows.

15. Looking at the shorter term picture for gold, it has broken out of a symmetrical triangle, and has pulled back towards the apex of that triangle. If you are a technical trader, the opportunities don't get much better than what you are looking at right now. For myself, I play gold in multiple hundred dollar moves, so the current $40 drop in gold has seen some modest buying, but if it fails here that buying would only accelerate. I have no "stoplosses". I call them "takelosses". Stoplosses are an attempt to hold a whale with a fishing line. Reducing the size of your trade is your first step to be used long before you play with stoplosses. I'm hearing a thousand different numbers for where gold is going, but very little about whether people are actually buying or selling. There seems to be two main camps: "if it breaks out over $1030 I'll buy" and "if we get a substantial correction, I'll buy".

16. What about "gold is down $40 and silver is down two dollars an ounce, so I'll buy a little here?" How about "the US dollar has rallied a bit so I'll sell a bit"? Unfortunately, those are empty campgrounds. And now price has left that opportunity behind.

17. Oil fell a staggering eleven dollars a barrel from the recent high at 76 just a month ago. As soon as I mention the word "oil", investors immediately think, "where is that going, it should go higher, but what if the stock market sells off, isn't oil moving with the stock market?" Oil fell almost 15% from the $76 level.

18. If you can't bring yourself to buy one dollar of oil after a fifteen dollar a barrel correction, should you really be playing the oil market? I believe the firm answer is: No. Of course I was a buyer of oil last week. I'm a buyer of oil every dollar down. All the way to Zero. Period. By maintaining a strategic 70% long to 30% short allocation of risk capital to your oil trading, you would have solidly booked profit into last week's oil weakness. And built long core and trading positions, some for free, with profits from the booked shorts!

19. Look at the chart below for oil. Notice I have only a few blue buy arrows. Many technical indicators are ambivalent or negative. To trade as a professional, use such action to tweak down the amount of risk capital you allocate to the trade. Do not use such action to make outright buy or sell decisions against "Queen Price". If the price of oil is down, you are a buyer. If the technical indicators are weak, you may be a slightly lighter buyer, but you don't buy zero oil after an $11 hit.

click to enlarge

Oil is in a price range of about $59 to $76. The technicians will tell you that if 59 fails oil could fall to about 42, but if 76 is taken out, oil could rise to 93. I agree with those technicians, but in terms of tactics, I would suggest you want to be a buyer of oil into the price of 59 and a bigger buyer below there. On the other hand, if oil were to turn around before hitting 59 and rise to 93, how would you feel with zero oil? Buy into the current weakness. If there is further weakness, buy more. Always trade in dollar amounts that feel smaller, literally, than seems rational. This morning oil has already rallied three dollars from the lows at 65! I'm already ringing the energy cash register at 5am as I write this, while most analysts are still trying to get out of bed. You decide: Rise and shine to your alarm clock, or rise to the sound of your ringing cash register. Which is the better way to wake up?

20. I believe the long/short hedge funds make an error with their attempt to carry 50% short positions in the commodity markets. Most go well beyond that at times, attempting to heavily short commodities when they believe are overvalued. The low risk nature of commodities is a gift to you. Take it and use it! Investors and fund managers confuse volatility risk with the risk of going off the board. Commodities have near-zero risk of going off the board, but extreme loss-to-you risk if you use leverage. By focusing on the long side of commodities with little or zero leverage, you are cutting your risk of total loss. Drastically.

21. The stock market right now is perhaps the best illustration of why investors must move in multiple pre-set stages of action, as opposed to price plopping with the idea you will be rewarded in time by their predicted prices. The new game seems to be an attempt to pull in some of the $3 trillion sitting in money market funds. The theme seems to be, "Come on in, everything is fixed, the insiders have decided to let you have large amounts of their stock at a minor 50%-200% booked profit for them." The fish are biting on the insider's fishing pole hooks, but there's no frenzy yet.

22. On the "sell all my gold at the market, I don't need any, here in my insane asylum" front, comes this tidbit from debka news: "The Pentagon has brought forward to December 2009 the target-date for producing the first 15-ton super bunker-buster bombs (GBU-57A/B) Massive Ordinance Penetrator, which can reach a depth of 60.09 meters underground before exploding. DEBKA file's military sources report that top defense agencies and air force units are also working against the clock to adapt the bay of a B2a Stealth bomber for carrying and delivering the bomb."

23. Apparently the ready date has been accelerated forwards by an astonishing 3 years and North Korea is also a potential target. Debka says production will be about 10 of these bombs. Keep in mind that most every major American war has occurred under a Democrat administration. (You may want to hold off for a bit on those "sell it all at the market!" gold orders).

24. Intermediate currency trends tend to be longer in time than stock market trends. Intermediate and major trendline penetrations in these items can carry substantial implications. This morning as I send this off the US dollar is tanking, the resource currencies are in astroblast mode, gold is back over $1000, silver is soaring, as is oil. This price action could continue straight to gold $1200, or it could end right now, nobody knows. Are you responding to this morning's prices? Or are you chasing them? Use trendlines to build price channels. You have to accept that most trendlines and channels "fail" very quickly. They don't really fail; price simply changes direction often, and new trendlines and channels must be drawn. Immediately, not a month later. The amateur chartist wants to see long price moves with beautiful trend channels. That's not market reality. Trendlines are critical to technical analysis, but they must be used as a tool to facilitate your systematic buying of weakness and selling of strength. The drawing of trendlines is an ongoing process, not a one time event. Amateur investors get demoralized and think price is rarely in a trend channel. Wrong! It's always in a channel, you just need the tools to identify it! If you draw the lines professionally and consistently, and don't try to out-think them, the trend channels will provide you with an exact chart picture of market direction. Use them to apply risk capital in and out of the market, buying and selling consistently!


Sep 30, 2009
Stewart Thomson
Graceland Updates
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