Forex & commodities on December 22, 2017: thoughts & outlook


Here are my discretionary thoughts on forex and commodities (oil, gold, silver, etc). I only trade the S&P 500.
Go to the homepage for my latest thoughts on forex and commodities.

Thoughts

  1. USD Index is firmly capped by its downwards sloping resistance trendline.
  2. The inverse correlation between gold and Bitcoin.
  3. Finalizing my medium-long term USD outlook
  4. Treasury yields on the verge of a big breakout? Probably not.

4 pm: USD Index is firmly capped by its resistance.
This is a bearish sign for the USD.

The weekly bar chart is even more bearish. The USD is being guided lower by its resistance trendline and is on the verge of breaking down below a key support level.

 
10 am: the inverse correlation between gold and Bitcoin.
There has been an inverse correlation between gold and Bitcoin since late-November now.

  1. Gold tanked when Bitcoin soared to $20,000
  2. Gold rallied now that Bitcoin has fallen 50%.



This inverse correlation exists because gold and Bitcoin are both seen as “anti-fiat currency alternatives”. There is only a limited number of people who are interested in anti-fiat alternatives. So Bitcoin going up = stealing gold’s customer base.
Bitcoin has crashed 50%, and a lot of traders are now stepping in to “buy the correction”. Bitcoin’s previous “corrections” did not exceed 50%, and these traders think that this time will be no different.
Bitcoin traders are looking to buy at $15000, $12200, $9900, and $7600. Notice the insanely wide scale-ins.
This tweet describes the general sentiment of traders who have grown fat on crypto profits.

Whether they are right (i.e. this is just a Bitcoin correction) or wrong this time (i.e. the Bitcoin bubble is over) is anybody’s guess. But eventually, one of these “corrections” is going to turn into the mother of all crypto bear markets.
5 am: this is my medium-long term outlook for the USD Index
I originally said that the USD Index would be range-bound for most of 2018 before breaking below this range in 2019.

Then a few medium term developments made me believe that USD would rally significantly and perhaps break above its 90-100 range.

  1. Republican tax cut.
  2. Potential Trump trade war.

The USD Index’s recent price action has cleared up my confusion. The USD will not rally strongly on either of these themes.

  1. The USD hasn’t been able to go up on tax cut news at all.
  2. Trump cannot start a trade war. His hands are tied by Congress.

There is no bullish theme left that can push the USD Index up to 100.
Hence, my medium-long term outlook for the USD is once again simple.

I think the USD will remain range-bound in the first half of 2018. Then it will break below the 90 support level in the second half of 2018.

What is the USD waiting for right now?
Merkel.
The USD was falling and the Euro was rallying perfectly until the September 24, 2017 German elections. Uncertainty has stalled the Euro’s rally (EURUSD accounts for 57% of the USD Index). Once Merkel forms a coalition or minority government in the next few months, the Euro should resume its long term rally.

5 am: Treasury yields on the verge of a big breakout? Probably not.
The 10 year Treasury yield is bumping up against a MASSIVE long term resistance.

I don’t think it will breakout in the next few months.
The 2 year and 10 year yield tend to move in the same direction. A big breakout from the 10 year will result in a big move higher in the 2 year as well. One yield might move more than the other, but I don’t think the two yields will move in completely different directions. (I.e. the 10 year cannot rally like crazy while the 2 year falls).
Unfortunately, the 2 year yield is extremely overbought on EVERY SINGLE time frame. Daily, weekly, monthly. This is not bullish for the 10 year yield, especially with the 10 year yield at such a big resistance.
Here’s the 2 year yield and daily RSI (14).

Here’s weekly RSI.

Here’s monthly RSI.

Such overbought momentum on EVERY TIME FRAME means that the 2 year yield will probably make a correction in the next few months before it goes higher. It’s extremely hard for the 10 year yield to breakout under this circumstance.

2 comments add yours

  1. So where do u see gold prices heading to? Continuing its upward momentum or a retest of it 1240 bottom?

    • I don’t know. Long term (ie 1+ year) definitely up. But medium term there is a 50% chance of gold and silver breaking down below this current range. 50% = I don’t know medium term.
      The range for gold and silver is getting narrower. Can go either way.

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