US Dollar getting hit hard as "safe haven" trades are being unwound

Over the last 5-6 weeks, as fears spread regarding the European debt crisis and the resultant impact on the large banks over that way, hedge funds and specs in general, fled out of nearly everything and into the US Dollar and Treasury markets as a safe haven. That made sense seeing that there were some suspicions that the Euro might not even survive and a breakup of the EuroZone was coming.

This panic buying took the Dollar from a major support level on the technical price chart and send it skyrocketing higher all the way towards the 80 level.

No sooner than rumors began to spread that the Europeans were working on a mechanism to recapitalize the banks and head off the contagion effect that might result from a Greek default, than the Dollar began sliding lower and forex traders went careening back into the Euro.

Take a look at the following chart drawn off this week's Commitment of Traders report from the CFTC. Note the extremely lopsided positioning of the speculators on the long side of the US Dollar. Guess what this means? As soon as any downside technical support levels are violated on the price chart, every single one of these spec longs beginto liquidate and head for the exits. The result is a cascade of selling that feeds upon itself and the paper gains turn into paper losses for those on the long side of the US Dollar trade.

That is an awful lot of potential and now actual selling that we are seeing or could see in the Dollar if it continues to move lower. The perverse thing about all of this is that the more optimistic the hedge fund world becomes in regards to the European bank situation, the more the horrific fiscal condition of the United States comes to the forefront of their minds. That translates to a wave of Dollar selling, especially seeing that the Fed's stupid "Operation Twist" mechanism is working to guarantee that foreign holders of US Treasuries are getting the lowest yield level possible for those Treasuries that they might happen to purchase when sterilizing trade flows.

The end result is that there is no reason to hold US Dollars or US Dollar based debt by foreign creditors.

As mentioned many times here on this site - the Fed's plan is to deliberately debase the US currency as a means of making debt repayment in devalued bills to its creditors. Many foreigners seeing this are working to sell their Treasuries and unload them into the arms of the Fed.

If the Dollar violates chart support at the critical 50 day moving average near 76.40, the chart picture will turn decidedly bearish and could allow a huge wave of speculative long side liquidation, plus fresh short selling, which could usher in another crisis in the Dollar, as that could drive the greenback back down towards chart support below the 74 level.

Dollar bulls had better hope the Europeans fail to get their act together and botch the recapitalization plan.

Backing out and taking a bit of a longer dated look at the US Dollar on its Weekly Chart one can see that the market remains in a longer term BEARISH TREND. Until or unless the Dollar breaks through the 50% Fibonacci Retracement Level near the 81 level, the Dollar's trend is down.

Gold still being held by $1680

The battle for $1680 is increasing in intensity as bears dig in to prevent what they know will be a defeat if they allow the metal to move convincingly through this level.

The factor allowing them to push a bit harder against the bulls today (and unnerving the bulls somewhat) was increasing doubts concerning the European bank recapitalization plan.

Get used to this - One might as well pick a Flowering Daisy and pull the petals one at a time: "She loves me; she loves me not".

That is what "investing" has been degraded to nowadays.

Tomorrow brings the end of the trading week. If gold can go out over $1680 into the weekend, it will be "GAME ON" for the bulls. If not, we remain trapped in the range trade that has been the model for the last few weeks.

Silver was whacked for a 3% loss today as the Risk Aversion trades came back on the heels of the concern over the European bank plan deal. If the trading contingent feels differently about that plan tomorrow, it will just as likely take back all of today's losses and then some. Again, get your Daisy flower and start picking off the petals. Some business isn't it???

Either way, it too reinforces $32.50 as the resistance barrier that must be taken out and held to get something going to the upside in the Silver market.

The HUI is no help whatsoever to the metals and will not be until it clears the 50% Fibonacci retracement level near 560 and holds it. Until it does, it is checkmated and in a range trade.

Money flows out of Bonds is fueling the current stock rally

Modern markets are all about speculative money flows, and primarily money flows from hedge funds. That can be subdivided further into "RISK" trades versus "RISK AVERSION" trades.

Take a look at the following composite chart of the US Treasury Bond and the S&P 500 index. Note the extremely close inverse relationship between the two lines.

Basically you can see the RISK trade versus the RISK AVERSION trade portrayed here. When traders are running away from risk trades, they are running into Bonds pushing those prices higher in the process.

When they are feeling aggressive towards risk, they are dumping bonds driving those prices lower and shoving equity prices higher.

So where are we in all this? Simple - if traders/investors believe that the actions of the European monetary and political leaders in regards to the bank recapitalization plans will be successful in averting any worsening of that situation, they will continue to move towards RISK trades and sell their recently purchased bond holdings as at least one source of "deflation" will be eliminated from off their radar screen.

If risk trades come back into favor, then the SILVER/GOLD Ratio is going to move  back in the FAVOR of SILVER after having moved in favor of gold since late April of this year.

Gold Bulls Pressing against the Bears' Line of Defense

I have noted that $1680 is a key technical chart resistance level for the gold market to overcome if it is to have a shot at $1700 and a chance to begin a trending move higher. I say this because one can see from the short term price chart that since late September, all forays into this zone have been successfully repulsed by the shorts.

Today the bulls pressed through this defense line but could not muster enough strength to hold their gains in a convincing fashion as the market retreated back below the $1680 level, although just barely. We have two days left in this week for trading. If gold can clear $1680 and hold this level by the time it closes for trading Friday afternoon, it should easily hit $1700 next week where the only resistance is more psychological in nature than technical.

Note that the downsloping red trend line has been broken in today's session gains by the bulls.

There are several factors currently working in favor of gold. The first is the recapitalization plan for the European banks which seems to have enough traders/investors convinced that the worst of that storm is over and thus are willing to take on the "risk trades" once again. The second is closely related to that in the sense that the safe haven trades are being jettisoned meaning that the US Dollar is getting slammed lower as long liquidation is the order of the day in there. The combination of a weaker Dollar and an environment in which risk trades are in favor has brought buying into the gold market. Since there is no need to sell gold to raise cash for any trades that have soured nor a need to meet margin calls, this overhead pressure on gold has for the time being been vanquished.

One other factor, which is important, needs to be mentioned. The upcoming Diwali festival season is fast approaching in India. A tremendous amount of gold is bought by dealers ahead of this season in order to meet the surge in demand that ordinarily results from Indians buying of the metal. That is working to keep a good flow of support into the physical gold market, especially on dips lower in price. That is being reflected in the rising levels of chart support that can be seen on the price chart.

The US Dollar continues to fade

Dollar bulls had better hope for a breakdown in the plans of the Europeans to get their bank recapitalization rescue package moving forward because it is rapidly falling out of favor as hedge funds flee the "SAFE HAVEN" trades (buying the Dollar and the US Treasury market). The Aussie is back over the 1.00 level, the Euro has pushed up to the 1.38 level, the Loonie is at the .98 level and threatening to move back to parity and even the Swiss Franc is showing a few signs of life.

There is a fairly large contingent of speculators who are (were) on the long side of the Dollar as they were plying the safe haven trade. Those positions, especially the ones that have been placed within the last three weeks, are all under water and bleeding red.

The Dollar is now moving into what should provide some buying support so some of these trapped longs are holding out hope that it can bounce from here. If not, it will fall back towards 76.50 as long liquidation is going to occur.

HUI nearing important chart resistance level

Mining stocks have been rallying alongside the broader equity markets as the bulls are frollicking in the pastures of increased liquidity being provided to the European banks courtesty of the recapitalization plans being discussed in that corner of the globe. That has taken away fears of bank failures tied to deteriorating balance sheets over in Europe and by inference, any hit to the banks here in the US. The result is "GAME ON" for the hedge funds once again as in they come into a variety of markets once again.

That had led to both a wave of short covering in the mining shares as well as fresh buying in some issues that has taken the index nearly 70 points off the recent spike low made earlier this month. However, shares have basically moved lower since the opening period of trade today as chartists are seeing a zone of formidable resistance against which some of either booking profits from fresh longs or are using as a strategic entry point for fresh shorts. That zone is a combination of of horizontal resistance associated with the swing high made back in May of this year as well as the most significant of the Fibonacci retracement levels, the 50% level which happens to come in very near the 560 level.

If the bulls want to take prices higher, they are going to have to buy in sufficient size across the sector to drive the index through 560 for a minimum. If they hesitate here, the index runs a good chance of retreating and moving back down towards 520 once again.

If the bulls show some mettle and charge higher, then 577-580 comes into play. A close of the index through this level would set up another run at 600-605.

Commodity complex reflecting more optimism related to the European bailout plan

The commodity sector has been slammed by hedge fund long side liquidation over the last 5 weeks which has basically taken the complex on a one way ride down and down hard at that. It has now finally bounced as nervous shorts cover for fear of getting caught overstaying their welcome on that side of the market should the hedgies' algorithms flip over into the buy mode over the chatter over European and IMF plans to deal with Greece.

The bounce could take it as high as the zone delineated by the pair of blue lines drawn on the chart. Should it breach this area with some gusto, it should see a return of some speculative money that has been sitting on the sidelines into the commodity sector as a whole.

Interestingly enough, corn locked limit up today with a decent sized pool of orders. News out of Russia on a ban on certain exports send buyers scrambling into both wheat and corn as Russia has been providing a substantial amount of cheaper quality feed wheat. The idea that this source will now end caused significant short covering. Considering there is a major report out tomorrow morning from the USDA, it is going to be anything but boring if the numbers provide any unexpected surprises.

Gold chart update

Gold took out overhead chart resistance last evening in Asian trade and looked very strong until trading came around into the London session, where selling surfaced taking it back down from its best levels and dropping it into negative territory for the day. Support surfaced just below $1665 level but the market could not get back into positive territory.

Gold is trying to break out to the upside but is being kept in check.

Silver once again flirted with overhead resistance near $32.50, moved through it and them promptly failed to hold onto its gains above that level. It found support just above $31.50, bounced higher and managed to claw its way back above $32. It too is attempting to breach chart resistance and make a break higher.

Both of these precious metals markets are very close to changing the "sell the rally" mentality so it will not take that much to flip the psyche. The fact that the mining shares as evidenced by the HUI are finding buyers at the present time is very helpful.

Other than that, there is really not much more worth saying about them until we get a definitive resumption of the uptrend.