Friday, June 1, 2012

Sold NUGT @ $12.80 - US Dollar: How Overbought?

I was fortunate today to sell my position in Direxion's Gold Miners Bull 3X ETF (NUGT) for $12.80. This trade resulted in a gain of 45.45% and is, as best I can tell, the largest single trade gain I have logged since starting this website a couple of years ago. A very nice way to conclude the last day of my 30th year as a public school teacher.

My TSI Trading record has been updated.

Click on any chart to ENLARGE.

I wanted to give readers a sense of the degree to which the US Dollar is overbought and created the following series of three daily charts of the buck - dating back to 1992. For each chart I am using the Stochastic Momentum Index (SMI) invented by William Blau (also creator of the True Strength Index (TSI) indicator) and using a setting of SMI (17,5). This magnification is ideal for getting a timely read on the overall status of price movement. A faster setting, such as SMI (5,3) is great for very short term trading and a slower setting, such as SMI (28,14), while exhibiting a noticeable degree of lag, paints a very broad view of price and trend momentum.

Our first chart (above) looks at the daily /DX US Dollar Index from late 1992 through 1998 and notes those occasions that the indicator reached levels exceeding 80. At this time (15-20 years ago) the buck was in a bull market that did not top until mid-2001. In this bull market environment one would expect that price would be able to stretch significantly to the upside, and it did.

Our second chart looks at the US Dollar Index from 1999 as it approached the peak of it's bull market in 2001 and its price performance thereafter into 2005. Notably absent during 2001 - 2004 are any instances that the index was able to stretch the SMI indicator above 80.

And this brings us to our final chart of the US Dollar - from late 2005 to present. Other than for the '08 episode, the index has not been able to stretch above a reading of 80. But for the past 4 trading sessions, the reading has climbed above 80. Last evening I observed it at a sky high 87. 

So how overbought is the US Dollar Index right now, you wonder? Well, other than for 2008, and using this particular Stochastic Momentum Index metric, it is more overbought than any time since July 1998. That's nearly 15 years.

And the question, at least in my mind, is what is going to happen to the price of gold and value of mining stocks when this historically overbought condition in the US Dollar Index begins to normalize?

(Read my mind).  :-)

Best always,


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