Lets Blow This up!

Following up on the Dollar discussion over the weekend, here is a monthly chart of the Dollar Index. I have indicated with lines and arrows a couple of nice turning points signaled by a three point divergence in the momentum oscillators. The one at the top was a beauty. I sure wish we had one here at this low, and maybe the lack of it does indicate we will not hold here. Technically if we did turn up from here we will have a three point divergence in the lower oscillator, but it is not nearly as clear as the two marked.

After having a friendly debate over the weekend with a friend who has the consensus view and hence opposing view of mine on the dollar and gold, I want to address my thoughts on this. First, I do not argue that in the end an inflation wave is coming here as the result of the government spending. The problem that I see with that is that in the near term, meaning a few years or less, I think we have a big deflation wave upon us. I base this on my reads of the COT reports and what they tell me about likely future market direction. They are as I have written in here indicating to me a large downwave across the board coming. I do not trade on my economic opinions. If that worked economists would be good traders not terrible ones.

I would love this chart to support my COT based view on things with a big obvious divergence at these lows which it does not. However, what I do use to break ties is sentiment numbers. The sentiment numbers have recently gotten off the charts bullish in alot of places, bearish in the Dollar. What this does confirm to me is my anecdotal observation that everyone in the world but me and Bob Prechter thinks the dollar is going way down and Gold way up. I just cannot remember the last time if there ever has been one, that the whole world including every small individual investor, was in agreement on a future outcome, and that outcome became a reality. Ask yourself that question, if everyone is bullish on gold and bearish on the dollar, who is left to buy gold and sell dollars?

This is an opinion I will grant you that, and I would not trade off just that alone. However, trading is a thinking man's business and at times you have to ask yourself common sense questions about things. For the dollar to become severely devalued from here you must also believe the US will become a second rate country. In as much as that appears to be the path the current administration is taking us on, they are going so far they are likely to be one term office holders, and a new group will come in and nuetralize what they have done. Net, net we don't get anywhere, which also means we don't go way down.

Does this chart showing a huge downtrend really indicate a bubble condition to you? It is like GOLD, they both may continue their trends, but is this a place you would want to place a large bet in continued movement in the same direction?

Maybe for the metals bulls and dollar bears, we will get a sharp correction here to both which will flip sentiment, and provide a nice continuation entry in the direction of the current trends. I could see a 40% to 50% Gold decline as setting up a nice buy spot. The following chart is showing something that to me is very bearish for Gold.

If you look at the patterns of the commercials and small speculators you see a consistent pattern. Commercials have been buying on the dips and small speculators have been selling. What is occurring now is not that pattern at all thus far. Commercials are adding to their shorts and small speculators are not selling yet. If the correction continues this needs to be watched to see if it drifts into the normal pattern. If it does we could very well have a nice dip to buy into. If it does not we could have a washout like Crude Oil had once it hit $140. At the moment this is bearish, but it needs to be watched to see if it changes. As you can see when the support levels in small specs have broken in the past we have had sharp down movement. If this recent decline continues enough to shake out some of the small speculators who have been late to the dance, this correction could get very interesting.