Forex & commodities on December 15, 2017: thoughts & outlook

Here are my discretionary thoughts on forex and commodities (oil, gold, silver, etc). I only trade the S&P 500’s ETFs.
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  1. The USD’s price action is still bullish
  2. Stay away from gold and silver right now
  3. Commodities are forming a long term bottom that will last into 2018.
  4. A bearish factor: the correlation between USD and interest rates.

4 pm: The USD’s price action is still bullish
I pointed out that the USD’s price action yesterday was abnormally bearish. That problem has been rectified today. The USD went up on tax cut news today. There is still a strong intraday correlation between the USD and the S&P 500, both of which are going up on the tax cut news.

I arrive at the following conclusion when I combine the USD’s medium term bullish and bearish factors

The USD will remain range bound from 90 to 100 over the next several months. A more likely range is 90 to 96.

I think the USD will first touch 96 due to the tax cut.
4 pm: stay away from gold and silver right now
The gold and silver markets are in turmoil. Their correlations with the USD, other commodities, and Treasury yields are going haywire due to the Republican tax cut. The best thing to do when a market is in turmoil is to stay away from it. Trade something else. Wait for the post-tax cut fervor to die down.

  1. Previously, there was a strong inverse correlation between the USD and gold/silver. The USD and gold/silver went up together on today’s tax cut news.
  2. Commodities and the 2 year Treasury yield soared today on the tax cut news. Gold/silver decided to follow commodities and the Treasury yield higher today.

These 2 opposing correlations make gold/silver very confusing right now. Both longs and shorts are getting killed because the market lacks a clear trend.
5 am: Commodities are forming a long term bottom
Jeff Gundlach went on CNBC yesterday and said

Commodities are historically cheap when compared to stocks. With historically low valuations and increasing economic activity, commodities are a screaming buy.

See below for what Jeff means by “commodities are historically cheap”. You get the following chart when you take a ratio of GSCI to the S&P 500 (GSCI is a commodities index).

Long term commodity bottoms are very complicated and take a few years to play out. Commodity bottoms are often flat. Here’s gold. Notice how gold made a long and round bottom from 1998-2001.

So although commodities are a great long term investment right now, they are still in the process of making a long and complicated bottom.
5 am: the correlation between interest rates and the U.S. dollar
There is a moderately positive correlation between the U.S. dollar and U.S. Treasury yields right now. Here’s the 20 day rolling correlation between UUP (USD etf) and SHY (1-3 year Treasury bond etf).
*An inverse correlation between USD and bonds = a positive correlation between USD and interest rates.

I previously stated that the 2 year Treasury yield is extremely overbought on every time frame (daily, weekly, monthly). This means that at the very least, the 2 year yield will struggle over the next few months as it washes out its overbought momentum.
There’s a positive correlation between the 2 year Treasury yield and the U.S. dollar. A struggling Treasury yield puts downwards pressure on the U.S. dollar. Hence, this correlation is a moderately bearish factor for the USD.

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