Trading Ideas for Week of Feb 27, 2012

Dow 13,000 watch continues. As I said before, it is not only meaningless but also dangerous zone for traders. Those who are long from lower levels are looking to dump on unsuspecting new longs, as they get sucked in by the media's excitement. Even if Dow closes above the milestone, it represents a fake buy signal, since there is no real technical signal at this level. I am looking to short on jubilation event. The biggest conviction to do so is the fact that Transports have not confirmed this latest leg higher by Industrials. According to Dow Theory, non-confirmation by averages creates one of the best contrarian indicators. It has worked beautifully all of last year. Why should this time be any different?

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I have been watching gold with amazement and deep respect. Yellow metal has been somehow able to once again hold its long-term trendline and muster a powerful rally. The inverted head and shoulders, which developed on the chart, has me scratching my head a bit. Can it be so easy? Projected target takes the price to a new high, just above $2,000. But where is the usual fakeout first? Necklines are a place of confusion at times. I suspect we will get some kind of shakeout pullback soon, as the right shoulder gets a little more time to consolidate.

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Gold's pullback will depend on the dollar, which has not done well lately. DXY has been neglected, as the risk rally around the world gained steam. It seems like everyone has now forgotten the notion that strong U.S. equities will result in strong dollar. Market quickly dispelled that myth. Traders dumped the king and turned it into a toad. Look at how Dollar Index and Dow correlated in the last five years. They almost always move opposite to each other. I highlighted the times when the two moved in tandem. As you see it happened very seldom, and not even 100% correlated on those occasions.
So I think that if risk rally comes to a halt, dollar will rise.

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Another development which may rescue the dollar is LTRO on Wednesday of this coming week. I do not know if euro sells off on the fact, or it may just start getting weaker before the event. My notion is that more euros in the system should eventually bring the exchange rate lower. I am not crazy about the idea of shorting yet, because of euro's strength against other currencies lately. EUR/JPY and EUR/AUD are breaking out above resistance levels. These crosses may be the reason why EUR/USD has continued its upward direction. Another reason for continued euro rally could be the remaining huge short position (reported in COT). I would wait for LTRO results and see how the market interprets them first, before putting on a trade. My bias on EUR/USD is lower. It is approaching the area where I would like to start establishing a new short. In order for downtrend to resume, series of technical breakdowns have to occur: inverted head and shoulders has to fail when price meets resistance at laminate of 200 day ema and top of the channel, then laminate of 20 day sma with trendline from Jan. low has to break, then price has to move below 50 day sma. It would be prudent to add to established short position on these breaks. Projected distance below the head would take EUR/USD to 1.1925, which should coincide with bottom of the channel.

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