Forex & commodities on January 24, 2018: outlook


Here are my discretionary thoughts on forex and commodities. I only trade the S&P 500.
Go to the homepage for my latest thoughts on forex and commodities.

Thoughts

  1. Don’t short gold and silver just because they’re overbought on the intraday.
  2. Everyone wants the U.S. dollar to fall.
  3. The U.S. Dollar Index has finally broken down below its 90 support level.
  4. Based on the economic data, interest rates should make a pullback or correction.

4 pm: don’t short gold & silver just because they’re overbought on the intraday
Gold and silver are overbought on a 1 hour bar chart.
Here’s silver and its 14 hourly RSI.
Here’s gold and its 14 hourly RSI

Don’t short precious metals just because they’re overbought. Historically, gold and silver rallies moved up in a staircase-pattern. Precious metals would soar and hourly RSI would become very high. Then precious metals would consolidate sideways (instead of pullback), thereby allowing RSI to wash out. Then precious metals would soar again, and the whole cycle continues.
The staircase-pattern kills shorts.
3 pm: everyone wants the USD to fall
China wants the U.S. dollar to fall. And now the U.S. wants the U.S. dollar to fall as well. Secretary of Treasury Mnunchin said today that a weaker U.S. dollar is good for the U.S.
This is true. Trump’s goal is to boost American net exports. He can do it through 2 ways:

  1. Start (and win) a trade war. This is unlikely because both sides of the Congressional aisle support free trade.
  2. Devalue the U.S. dollar, thereby making American products cheaper and foreign products more expensive.

Governments are very powerful forces in the forex markets. The USD’s bear case is fully in play, with both China and the U.S. supporting a U.S. dollar bear market.
The U.S. dollar is making lower lows and lower highs, which means that its downtrend has yet to be broken.

4 am: the U.S. Dollar Index has finally broken down below support.
Yesterday I said that the USD Index’s price action was weak: it was trying and failing to bounce off of its 90 support level.
The USD Index has finally broken down below this support level. There are no major support levels below here (besides fib retracements), which means that the U.S. dollar’s decline should accelerate.


4 am: Based on economic data, interest rates should make a correction.
Over the past 20 years, there has been a moderate-strong positive correlation between interest rates and short term fluctuations in the economic data.

The short term fluctuations in economic data can be summarized by Citigroup’s Economic Surprise Index. Historically, a decline in the Economic Surprise Index has led to a decline in interest rates (i.e. 10 year Treasury Yield).

The Economic Surprise Index was at a peak recently and is going down right now. So from a historical perspective, this means that interest rates should fall right now.

The 2 year Treasury yield is insanely overbought on a weekly bar chart. These 2 factors are bearish for interest rates in the medium term.

Read Forex & commodities on January 23, 2018

Bottom line

I only trade stocks. These are just my thoughts/outlook on other markets.

  1. Gold and silver will break above their tight range in the first half of 2018.
  2. The USD Index will crater below its final support (90-91) in the first half of 2018.
  3. The best traders I know are still bullish on Bitcoin in the short and long term. I don’t know when the crypto bubble will end.

5 comments add yours

  1. Hi Troy,
    I am a Canadian, how low do you think USD will go? If it drop 20% going back 1:1 to caD, then it doesn’t make sense for me to invest in the higher risk stock market where all the gain will be wash out by the exchange rate. Would it be better for me to just convert back to CAD and invest in Canadian or other market?
    Thanks.
    Alex

    • Hi Alex,
      I don’t know how much the USD will drop over the next few years. But I think a 1:1 is likely.
      Personally, I think Canadian stocks will do well over the next few years. The Canadian stock market is heavily tied to commodities. With rising commodity prices over the next few years, I expect Canadian corporate earnings and stocks to do well.

      • Hi Troy,
        Another question. Does your models take into account the currency exchange rate? Is there any correlations? I am wondering historically, if any international fund manager take money out of the stock market because of weak USD?

        • No, it doesn’t use forex exchange rates. we tried using correlations between the USD and stock market, but that never worked consistently.

Leave a Reply to Troy Cancel