US Dollar - We've Seen This Before

This post will be brief as I haven't time this morning to write much.

The US Dollar (/DX) is most likely playing a familar game with investor's psyche at the moment. Here is a chart of the buck from 2010 to present. 

Click on any chart to ENLARGE

A close look at the action in January 2011 shows us a hair raising nail biting encounter with the dark force that lasted all of 3-4 days.

And so, here we go again - but perhaps things will settle down sooner than 'last time'.

The bull will win any battle he choses to get involved with, but on his own timetable. And remember, it is the bull's market.

TSI Standard Deviation Indicator: Gold Ready to Rocket

First of all, I wish to thank my friend and colleague TrendXplorer (outstanding website IndexSwingTrader) for making publicly available the ThinkorSwim code that I reworked for use with the True Strength Index (TSI) indicator in this post. If you are interested in reading more about this indicator from his website, click here.

The indicator we will look at in this post is the TSI (7,4), but with an interesting twist. The twist is that while the shape of the TSI is normal, the scaling seen on the far right side of the indicator is different. Quite different.

What this hybrid of the TSI does is consider the readings of the TSI over the past 200 weeks and then figures out the mathematical standard deviations of the TSI readings. 

So in this case, a measurement of zero is the mean. 

And we should not be surprised to observe that the TSI spends a lot of time - a lot of the 200 past bars - very closely just above and below ZERO.  Readings in the range of, say 35 or -35, are not as common as those nearer ZERO. Not surprisingly this hybrid TSI identifies these less frequent readings as being somewhat above or below the mean - perhaps near the 1.0/-1.0 standard deviation level. And so on.

Let's take our first look at this new hybrid TSI with a 15 year weekly chart of the gold futures (/GC).

Click on any chart to ENLARGE

The TSI indicator is colored purple when rising and gray when falling. The horizontal red line is the mean (ZERO). 

The bigger picture perspective this chart provides is a sense - over 15 years - of how often the TSI reaches either 2 standard deviations above or below the mean. And just as importantly, once it reaches such an extreme, how long does it stay there?

My other chart for this post gives us a closer look at the current situation. We would be hard pressed to find more than 5 times in the past 15 years the TSI nearly reached the -2.0 standard deviation. Yet look where we are now.

Gold has been turning north this evening and the  current TSI reading has changed color from gray to purple - indicating that momentum is beginning to bullishly reverse direction.

Of course, anything can happen from here. But for what its worth, this standard deviation reading of the TSI tells me gold is ready to rocket.

Fingers crossed.

Gold: So Far, So Good

Things have gotten a bit more complicated since I wrote my December 19th post 'Where's the Fire?', but I continue to ask the same rhetorical question and am somewhat amazed at the 'freak out' all around me. Yes, things have been strange lately with the gold and dollar behaviors but I don't think without a decent explanation which I will offer in this post.

One of the things I have quietly been puzzled by is the lack of a credible trend line break of gold's intermediate cycle begun on May 16, 2012. I have been unable to find a single intermediate cycle that did not have a trend line break - and I have looked at all 31 previous intermediate cycles. So, for starters, I have been waiting to see if this event would occur and as of a few hours ago, it finally did.

Click on any chart to ENLARGE

I chose 6/28 and 7/12, along with the origination low of 5/16, to draw the intermediate cycle trend line. There were conflicting lows to chose from, as I am sure you will note, but my choice gave me two lows, not one, in alignment with the 5/16 low.....and that seemed as good an argument as any for my choice.

Some of the curious items: 

1. This intermediate cycle has, as of today, measured 165 days. Until now, the longest intermediate cycles occurred in the 2009 C-wave and were 148, 131 and 120 days. In 2007 the C-wave leading up to the 2008 parabolic included a pair of intermediate cycles that measured 128 and 127 days. The longest intermediate cycle in a D-wave was in 2008/09 at  123 days. 

(See my December 28th article 'The Microscope on Gold's ABCD Pattern and Intermediate Cycles' for details).

2. This intermediate cycle began with a daily cycle that peaked on Day 15 and concluded on Day 31 - the definition of a left translated cycle. No other C-wave has begun with a left translated daily cycle.

3. This intermediate cycle has included 7 daily cycles nested within its massive structure. No previous intermediate cycle has used more than 6 daily cycles. 

4. Every C-wave intermediate cycle top was followed by a left translated daily cycle with a couple of exceptions (3/2/2006 and 6/6/2011). Not this one. This intermediate C-wave cycle topped on 10/5/2012 and the following daily cycle topped on 11/23/12 and was right translated.

Turning to a 60 minute chart for a closer look at the trend line break of the intermediate cycle and the trend line break that just missed on December 20th, we have this chart (below).

There has been some speculation that the U.S. Dollar Index is presently suffering from an aborted intermediate cycle that was expected to be bearishly left translated but has now got a whole new attitude.

I'll admit that it is a screwy situation, that is for sure.

But this is what I see.

The dollar began a new intermediate cycle on February 29, 2012. It peaked on July 24 (day 61) and bottomed on September 14 (day 99).

This was followed by a shorter intermediate cycle that peaked on November 16 (day 45 - /DX 81.515) and bottomed on December 19 (day 68).

This shorter IC peaked much lower than the previous IC - thus the lower highs concept of a change in trend direction. BUT, this IC was also bullishly right translated and did NOT make a lower intermediate cycle low than the previous IC. We would expect (if not demand) that this IC would make not only a lower high but also a lower low. This means to me that my IC explanation is suspect.

You understand why I characterize this situation as screwy, right?

Holding on to the concept that cycles break their trend lines before moving on to a new cycle, you will note the purple dashed lines I have drawn on the chart above. Clearly, the IC trendline begun on September 15 has been broken.

Anyway, I offer another possible interpretation: this IC did not conclude early on day 68, but is still ongoing. If it should bottom below the pricepoint where I have put the '99' (/DX 78.725) and do so after the 90th day (defining a left translated IC - as expected) then everybody would probably be real happy. Oh, lest I forget....it would also be required that the 81.515 current high for the IC not be surpassed to the upside.

I see that the dollar is presently stuck at the precise price level of the left shoulder top of the head and shoulder's pattern there has been so much talk about. Perhaps traders are a bit dumbfounded about what comes next as the rest of us?

Well, I say, hang in there. For the FED to be buying 80% of the US Govt debt (because there are no other buyers, obviously) and then infer that they will stop this practice sometime before the end of 2013 is the idiocy of all statements I could ever imagine. They are dreaming and hope you and I believe the dream - while they have transferred all the debt of the private sector's mistakes onto us, the public taxpayers. Ha ha. I say bullshit.

And besides, it's still a bull market!

John
tsiTrader@gmail.com

True Strength Index (TSI) Compression Patterns

Just for a change of pace I'd like to show you some new techniques for using the True Strength Index (TSI) indicator to generate timely BUY and SELL signals. These techniques involve 4 different patterns that the TSI may form before a powerful breakout occurs and prepare you to be on high alert in advance. I call these general patterns 'compression' patterns and as you will see, the TSI indeed can be compressed in such a manner with respect to the movement of price that the change in price trend direction becomes obvious very quickly once the TSI compression is released.

The names I have given to these compression patterns are: wedge, bullish, bearish and ZERO line.

Let's now look at an example of each, beginning with the wedge compression.

This daily chart of the U.S. Dollar Index (DXYO) is a classic example:

Click on any chart to ENLARGE

The bullish TSI compression uses a tactic of rising TSI lows as price consolidates. I also refer to this technique as 'stealth' because the rising movement of the TSI lows is quite unseen by traders (who do not read my blog, that is).

The bearish compression pattern of the TSI is one in which the TSI makes a series of lower highs and lower lows - a descending channel - while price appears to be generally rising. 

Like each of the compression patterns, the bearish pattern takes time to develop. However, if one knows to look for this it can be seen some time before it detonates price (which offers a decisive trading advantage). 

And finally, let's have a look at the ZERO line compression pattern. This one, somewhat like the wedge pattern, can be either bullish or bearish. But in this case one knows in advance which it is - because it depends whether the TSI is above ZERO and being repelled (eventually bearish) or below ZERO (bullish as in the chart below).

The key point to always try to keep in mind is that as long as the TSI is above ZERO, and especially when it is rising, price is always rising. And just the opposite for when the TSI is below ZERO (as in this chart of GDX). 

Well, now you have some new tricks to use when making your next trading decision. Go get 'em!

John
tsiTrader@gmail.com