A Sleeper

Well,

I couldn't be more wrong today as I expected today to be a somewhat volatile day, it wasn't. In fact most of the day the market was range bound with a slight drift up after the gap down. 3C was just about as flat, a slight divergence here or there, but nothing to get excited about. However, as of this moment, once again the Euro is falling of a small ledge like it did last night which I believe caused the gap down this morning.

Here's what the EUR/USD chart looks like...

 This is the hourly EUR/USD chart. Note the moving averages have all made another bearish cross, the last time was late October (red box to the right).

 This 5 minute chart shows the Fed's QE2 announcement, when the FX markets opened this week and where the Euro is at vs. the dollar as of the time of this capture. Of course a lot can happen overnight.

This is another 5 min chart, just a closer look. You can see when the US equities session ended and what the Euro did after that. 

Here's the Dollar index:

 Above you can see the last time we saw a positive divergence in the Dollar Index starting around October 2009. The green arrow shows price moving down, the white arrow shows 3C moving up, this is a positive divergence and is interpreted as large institutional accumulation of the Index. Now we have a similar, if not slightly larger positive divergence in the Index.

 Here's a close up showing accumulation starting around the $81 level, of course accumulation at lower prices gives you a lower cost basis, but generally, in the past, an effective positive divergence will usually pass where it began accumulating, meaning if this is a successful divergence, I would think from past experience that the Dollar Index would rise to at least the $81 level.

This is the last positive divergence in 2009 (daily charts). You can see the first green arrow showing downside confirmation, that transitions into a positive divergence for about 3 months, similar to the amount of time our current divergence has been in effect. The long green arrows show price confirmation, meaning a healthy rally that you can expect to continue right up to the top, where we saw a negative divergence and reversal. Then, much like now, I had no idea what the catalyst to propel the dollar higher would be. Over the weekend I posted a report showing traders accumulating the dollar. They aren't called smart money for nothing, they know a lot more then we do and this is why we try to figure out what they are ding and follow in their footsteps when the trade makes sense from a risk perspective.

Here is UUP which I use as a proxy for the dollar index because I don't have intraday information on the dollar index, where as I do with UUP.

Another daily 3C chart and showing similar divergences in the same areas. The red arrow is the end of the 2009 Dollar Index rally.

Considering the second round of QE that has been mandated by the Fed, the dollar sure is acting strangely. Of course we have to discount the problems in the PIIGS countries (Portugal, Ireland, Italy Greece, and Spain)-especially Ireland and Greece. However, there's something different going on right now. Everyone in the world knew to expect $500 Billion, so really the announcement didn't come as a surprise (A surprise would have been the $2-$4 trillion some speculated we'd see), yet the world is up in arms (Here's a link from Bloomberg about the World Bank telling Asia they may need capital controls because of the Fed actions.) and it's a topic that is quite complicated, but now showing up in the mainstream press. I think you could say with some credibility that the consensus of sentiment regarding the Fed monetizing the national debt has not been a popular one. Before it was announced, I said there would be the unintended consequences that dogs Fed actions. One has been of global outrage and the preparation of retaliatory action by other nations-as I said last night, the G20 summit should be interesting. A question I have in my mind is whether QE 2 will arrive as sold. We get 3 new hawks voting on the FOMC board next year and a new congress which will put Ron Paul in a position to be a thorn in the side of the Fed-Ron Paul has long been a vocal critic of the Fed and would like to see it gradually abolished.

Many people do not know the real story of the Fed, which just celebrated the 100 year anniversary of their secret meeting on Jekyll Island that created the Fed. This is a very interesting documentary about the Fed and whether you agree or disagree with parts of it, I found it to be pretty impressive. It's a long watch, but once you get started, it'll be hard to walk away. You can find it in sections on YouTube or you can Google it and order the DVD for yourself, but if you are interested in how the system works and I mean the system-everything capital markets, politics, etc-this documentary will give you some chilling insight.

In so far as the daily SPY chart goes, it's still in a negative divergence, nothing changed today, here's the chart...

The green arrows are meant to show price, the red show negative divergences in 3C. Remember, confirmation =higher prices, higher 3C readings, so we've had a negative divergence in effect for some time, but we've seen these before, especially in 2007/2008.

So we'll see what the currency market doe overnight and I'll continue posting new trade ideas. I still like the BAC short...

Here's why. This has been in a 7+ month downtrend losing over 35% and it's stayed within the trend channel. It may very well breakout of the trend channel and end this leg of the downtrend, but the risk with a close of $12.60 and a stop around $13 is pretty reasonable and if you use risk management and do not risk more then 2% of your portfolio on the trade, then I think it's worth a look, especially as the drama continues to unfold in the banking stocks BAC certainly included.

Have a great night...