The US Dollar is as much a focus for me this week as it has ever been.  It is starting out the week testing it’s latest lows.  Some quantitative research I’ve done has been me focused on possible meaningful dollar bounces starting as soon as the end of this week.  Not to mention, the tightly wound up correlation between so many markets: gold, energies, indices, bonds, and dollar, still has my curiosity peaked.  So, pretty much the dollar is the key to much of my trading activity for the week.  If the dollar holds, perhaps I’ll engage some markets.  Otherwise, I’ll stay on the side and let the current trends continue to run their course, a course that is no longer interesting to me for a myriad of reasons.

I’ve lost the illusion of sensing I can see good opportunities on the grain markets.  And, the softs seem a wee bit off kilter for my tastes.  So, I’m pairing my focus at the start of this week to metals, currencies, and indices.

Options traders remember we have expiration coming on Friday!  The next expiration will be December expiration at which point the smarter trading community will already be taking position for the new year’s trend.  It’s not too early to start thinking about 2010.  This markets may be able to run higher, but, not forever.

While I’m on the subject of options, keep in mind what sort of traders will be rewarded this expiration.  Let’s just assume our more sophisticated traders are using rather dumb market neutral strategies.  Let’s assume the more naive players have a directional bias.  So, roughly speaking the majority of “smart” trades would have gone on around October 16th.  Let’s assume sometime around 10-15 days into the trades, IF AND ONLY IF, they were profitable, they would have taken them off.  Otherwise, smart money would be looking for those markets to be within a similar price range as we close out those contracts which will expire this week.  At which point those markets will be free to explore new ranges in ways they haven’t previously been able too.  One market near and dear to my heart is the metals market.  If this logic pans out, I could see perhaps one more sucker’s rally before a decent breather.  Time will tell.

General outlook:

As always, this is purely an empirical and a theoretical exercise.  Trading is extremely risky.  If you were to trade, you should only ever do so with money you can afford to lose.  Be well, be safe, and be warm.

Albeit it’s still seasonal prime time for gold.  There should be many great weddings in India, drowning in gold.  And, heck, I agree with the scathing write-up on ZeroHedge about why this isn’t the blow-off top on gold.  Regardless, I’m still a bit suspect of this market.  There are a few things I want to say on the subject:

• The price of gold can come down really fast.  If you haven’t been long gold past a top before, you are naive.  This is a speculative market.  It’s a small market.  And, when it is time for it to take a break, watch out.  I remember being with a bunch of trader’s in Vegas during a metals run a few years back.  Sometime during day two of our stay the market turned over.  It ruined the visit for a number of new friends.  In short, don’t fall asleep at the wheel.  Just like any other market, this one is prone to sharp corrections.
• We’ve come a long ways.  We are up about 30% since April.
• I’m seeing signs of technical divergence surfacing on the price charts.  I’d go into more detail.  But, in this case, the technique I’m using is not published.  It’s not one I came up with.  But, it’s really not mine to share presently.

I’ll I want to say is be very weary of your long positions.

Even better than some general advice, let’s take a look at some recent history so you can get a feeling for 4th quarter gold prices:

Gold at the end of 2004:

Gold at the end of 2005:

Gold at the end of 2006:

Gold at the end of 2007:

Well, that’s 4 out of 5.  In 2008, gold had started a significant pullback earlier.  It was not up to it’s usual self.  Needless to say, this year’s market is set up for an opportunity here.  But, I am definitely not encouraging anyone to be shorting gold at these levels.  Just because the opportunity may be there, it may not be the smartest trade.

Nice wedge on the US Stock Indexes.  I don’t care, take your pick: Dow, Nasdaq, Russell… from my view of the world, it’s one and the same.  But, looking at the journey from our top in October 2007 to our low in March 2009, we are about halfway home… not quite though… and take a look at the gorgeous wedge that has come together here.

It’s Sunday evening and the futures markets are testing Friday’s highs.  I love it.  That’s encouraging for the bears in the neighborhood.  I’d be looking at an opportunity to catch a short on the equities Monday through Wednesday of this week.  Of course, a big part of this observation has to do with the risk/reward.  Although new highs in equities is somewhat hard to imagine, new lows in the Dollar isn’t.  So, as always I’m quite likely wrong.  So, if you find yourself short the market and hitting new highs, get out.  Big picture: this looks like as good a risk reward as you could look for on a trade and the markets are heading towards halfway home… perhaps it’s time for a break.

The higher the markets go, the sicker I feel.  No that’s not quite it.  I did catch a cold over the weekend.  And, I am actively monitoring price action.  If I see any really strong opportunities that stand out, I will call them out.  Otherwise, it will not hurt to sit tight for a few days, as post-fed and post-unemployment the market clarifies it’s current conviction and direction.

If you must trade, there are a couple key markets ripe for some straddling, coffee and cotton are at the top of that list, with markets like sugar and indices not too far behind.  But, the big picture, the dollar is really weak here.  I’d advice to watch this play out.  We could quite likely take 2-5 days for the dollar to clarify that it is going to take on lower levels.  In which case, step aside and watch the foolery ripple through the rest of the markets.

Don’t expect much activity this week as I work off this cold.  Meanwhile, stay warm and keep your capital out of harms way.

I can’t tell you what tomorrow will bring.  But, given the non-days of Monday and Tuesday, I’m not exactly expecting tomorrow to find the beginning of a substantial trend tomorrow.  Plain and simple, I have very little to say tonight.  Whether I’m wrong or right, I’m pretty much planning on postponing any significant trading until the market starts to inflict some more pain.  Although this sideways action might be helping fatten me with some premium on the butterfly on silvers I throw out last week, it’s not doing a lot for my speculative futures plays.

Instead of getting frustrated, I’m getting focused on a few other things for the moment.  So, I’m going to wait and see.  I’ll be back before the week is over.  But, my interests going forward are definitely honing in on Friday and next week.  Who knows, perhaps we’ll see some head fakes in a few key markets over the next few days.  Read the tape, watch intraday if you can’t get away.

I’m looking at a very curious daily trading range of 5.12 for the Dollar Futures Index on NYMEX.  That’s about 5 times larger than the largest daily range in the past five months.  Within the next couple weeks, most quote vendors will have cleansed today’s bar out of their quote systems because it makes their charting software look broken.  But, the reality is, if you had a stop order in, you just got filled.  The US Dollar just swept through about 6 months of trading range in about five minutes this morning.

This is not the first time we have seen this sort of behavior in electronic markets.  But, it is very questionable behavior.  And, it brings to light the question as to how well electronic markets actually function.

Here is a view of this chart from an electronic broker:

And here is another view through another data vendor:

As I say, this is not the first time.  The last time it was a downward spike in the US Dollar Index.  It was within the past 6 months.  I’d show it to you on my charts, but, of course, it’s all been cleansed out to make the charts look pretty.  But, I remember it vividly because I was actually long dollar then.  And, in about five minutes on a Sunday, I was in extreme pain, as my charts indicated that the Dollar had made about a 3 month move in five minutes during a time I was vulnerable, I was manually entering stops on a daily basis that week.  I went for a run to catch my breath before I did anything hasty.  Upon my return almost the entire move had come back, much like the move out there this morning.

It’s not a good way to live.  Chalk this up on the list with Dark Pools and Flash Trading, under questionable practices on electronic markets.

Not a whole lot here.  But, I listened to Michael Bowles talk on Neural Nets and Rules-Based Trading System at Fora.tv.  It leaves a lot to be desired.  He uses Neuroshell and some really basic examples.  Not a particularly profound or well organized speech.  But, if you are fiend for this sort of research, you might give it a shot.

Additionally, ZeroHedge pointed me to the IQS Quant blog, which they refer to as a must read for Quant types.

I’ve written about coffee quite a bit over the past few weeks.  It’s been a topic of my posts because of what seemed to be an interesting opportunity to get long coffee in the near future (a couple weeks back).  It was something I stumbled onto in my nightly research.  I was a little surprised by how hard coffee bounced today.  And, I wanted to see if I had missed the boat on that opportunity.  Let’s review.

So, the forecast suggests two interesting timeframes to be looking to get long coffee between now and year end: October 26th and November 19th.  These are highlighted in the chart below.

Now, let’s take that to the chart.

What’s the chart saying?  First off, look at that beautiful coil.  We have definitely penetrated to the upside.  Can we hold it?  Good question.  Only time will tell.  But, look at this historical resistance around 144.25.  If price can hold above there, I’m a believer.  You see my target up towards 160.  There is potential for a solid trade as this price action unfolds.  Just keep the risk reward ratio in mind and don’t be a chasing fool.  Forecasts have to take a back seat to price action.  They are only guides to get our thinking started.  Price action is the authority.  Watch this unfold.  And as always, see the disclaimer.  Futures are high risk.  I am not offering any trading advice and take no responsibility for your actions.  This is strictly for educational purposes.

As precarious as the world feels and as heated as the markets are, it is starting to feel that things might very well proceed in a more orderly fashion.  What is orderly?  A very curious cascade of ill timed events and slight price adjustments teasing prices generally higher with due correction from time to time.  But, many markets are testing critical levels or are nearing the end of significant coils.  So, at any moment, things can change quite dramatically.  Proceed, life as usual, one hand on the cup of coffee… ho hum… and the other on a shotgun.  Just in case, we have unwelcomed intruders, we are prepared to defend ourselves.

Because market timing is never something we will know with any great accuracy, it’s important to keep trying and probing.  Even though, I’m much more interested in the downside of a lot of these markets, I’m still actively setting up trades to take advantage of the long side.  As always, every trade, long or short, know your entry, your exit, your target, your risk, and your reward.  Under no uncertain terms, these are all givens.  It’s the research and preparation that goes on before you relay an order to your broker.  There is zero tolerance for improvisation when you have your trading groove on.

So, where is my attention tonight?  How have my thoughts adjusted over the past 24 hours?  Yesterday, I had orders on in Bonds, Cotton, Sugar, Silver, and Crude.  I got zero fills.  No biggie.  It played out as a very orderly “bounce” / range bound day after a monster trend day.  Perfect days for losing lots of money.  I was grateful not to get pulled in.  And, it gave me a chance to look at things again with fresh eyes.  What do my “fresh eyes” see?  Two things primarily: #1) I’m less interested / concerned with equities, bonds, metals, dollar…. more small moves ahead… worth waiting for the story to develop further before taking key positions.  #2) It brought a little more personal interest towards the bullish scenario.  So, I personally will be looking for both long and short side on some of my key remaining markets.  But, again, I’m putting some of the gunpowder back in the shed.

Be ready.  Above and beyond all things, be prepared.  Know what you are willing to risk and what you are looking for.  You don’t always have to be right.  But, you need to know what you believe; and, your belief must include an expectation with both a very specific measure by which you will know you are right and most importantly a very specific measure by which you will know you are wrong.  If you don’t enter every trade with both exits in mind, the profitable one and the losing one, you aren’t trading responsibly.

Last week should not be taken lightly.  A 5% sell off on US equities is not a trivial affair.  If we can take off up to another 10% in the next two weeks, I will be relieved and strangely bullish.  On the other hand, if we take out the highs, I will very quickly be on guard for significant crash symptoms ahead.

What do I expect this week ahead?  I expect over the course of this week and possibly part of next week to put in some short term bottoms on equities and a number of other commodities.  But, more important than expectations are what you are prepared to handle.

Keep in mind 2 of the 4 indications of a very large market top being put in have occurred.  The first being we have extreme correlation.  Not only do we have more markets intensely correlated than is systemically healthy; but, many of them are starting to get to extreme levels.  It’s pretty much the world against the dollar and bonds.  If the dollar and bonds go down, stocks, grains, oil, metals, other currencies, other commodities, go up and vice versa.  The second key ingredient to a major market top is extreme volatility.  We are seeing VIX over 30, 5% weeks, breaking of major support and resistance in a wide range of markets.  You should be on alert!

If you followed my commentary last week, I wrote:

Favorite set-ups on the horizon: Very interested in an opportunity to short metals on the immediate horizon.

Silver opened the week at 1771 and closed down at 1630, falling 8% for the week.  So, if you didn’t catch my post on Wednesday before the GDP announcement to take profit, you got another break on Friday.  Of course, if you have more contracts out there, leave some for the longer run.  I read about Joe Ross calling Gold at 400.  Why not leave a little on for the bigger play.

Meanwhile what other opportunities lie ahead for this week?

I’m starting my week looking at possible short in Cotton, Oil, and Sugar below current prices.  Only below current prices.  I’d love to be long bonds.  But, I just don’t have the appetite for that much exposure at the start of the week.  So, as much as I may believe in the trade, I’ll hold off on that one.

General outlook:

We are officially on red alert.  Be prepared to sustain this pace right up until Thanksgiving and beyond.  It is very unclear as to exactly how the story will unfold in the immediate future.  But, this is a great time to pay attention.  With both Fed announcement and Jobs reports, this is likely to be a high impact week.  Be safe.  Be conservative.  And above and beyond all, be prepared.