Technical Picture - $USDX Strength Weighs on Precious Metals and Commodities

Markets gapped up on strength overseas, but sellers quickly took control and the opening gap was faded. Not satisfied to simply fill the gap, the bears persisted, and helped along by a stronger $USD, sent prices all the way down to yesterday's gap support for tech and almost a full PD gap fill for the S&P. Small caps were hit even harder still. The only bright spot was the DOW, which managed to end the day on the plus side. Prices started to stabilize and bounce midday, and got a further boost from the FOMC minutes. However, late day price action became much more volatile and after hours, the bears are hard at work.

On the SPX chart above we note that open interest CPC is still too bullish and needs to correct. Today's stick not likely a hammer, more likely a hanging man, but that needs to be confirmed.

Note that the VIX, which has gone virtually ignored for months, is forming a bottoming pattern which looks like a mini inverse H&S.

Yesterday, the dollar held support and today it bounced, holding most of its gains into the close.

Dollar strength meant pressure on commodities and precious metals. Crude carved out a bearish evening star reversal pattern over the last three sessions.

Distribution in gold and silver. Look for more downside if the $USD strengthens. On the SLV chart we see multiple waves of RSI divergence to higher prices. This time I think we will see a deeper correction.

I still have a core swing short position in SLW which I was very tempted to cover at $36.00, but I believe it's going lower, so I'm holding on.

Coal technicals are still strong, but we have a bearish island reversal waiting to happen. Watch the futures in pre-market.

Semis are holding up well, but a correction would be healthy here given the steepness of the trendline.
MOO has already corrected, so I'm expecting a retest of the base. World food shortages are still problematic, and I expect Ags to be one of the leading sectors in 2011.

Commodity Rotation Cycle - In a commodity bull market, precious metals are the first to rally, followed by other metals, agriculture is third and oil is usually the last rally in the cycle. That said, it stands to reason, that precious metals will be the first to correct. Just a thought from a non-expert.

Mailbag - How to Use the Volatility Index in Day Trading

The VIX and VXN measure market volatility for the S&P and NASDAQ respectfully. Volatility increases with fear or market declines. It is very rare to see extremely high volatility during periods of market euphoria. Last week's extreme readings tested highs previously recorded during the TECH bubble meltdown in 2002.

It's probably a good idea to review these charts regularly along with other key market indicators in order to have a good feel for the market and have an expectation for the short-term.


The next two charts are the intraday 15 min. charts for the E-mini Nasdaq futures versus the VXN. As you can see, we have inverse relationships. On Friday when the market gapped up and faded (pts. A-B), the VXN did the inverse, gapped down and faded. EOD today, the market sold off (pts. C-D) and the VXN, broke out of its narrow trading range and rallied.

The intraday action on the market can be confirmed by looking for an inverse action on the VIX/VXN.