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Trading Volatility, Ballasted by Gold

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Be careful leveraged ETFs because of the well-document 'decay' effect... Whilst SLW is less volatile on a daily basis than silver (since marketmakers know the silver price will bob up and down), it is an amplified play on silver over the longer term because of its business model. So, I made 5, 6x on mine bought March 2009, but the silver price didn't increase by this function.

Yes, good point. I have sent an email to a broker friend of mine to see what exactly is involved with this ETF... margins etc. If I bought it, it would only be after another bout of deleveraging [if it comes] at the bottom. I think I need to do a crash course in this stuff. I spend too much time thinking about the macro stuff. :lol:

 

Thanks for pointing out SLW [check out the weekly chart, awesome, just the sort of thing I'm looking for]. It should get hammered in another round of liquidation. I'm not saying that we will definitely see this... it's more about a hedging play in case we do see it. Maybe SLW is better for my purposes as I am not looking to trade often... just on the big moves. I think I'll fund my broker's account with dollars [don't mind sitting on dollars for a while] and if we see a big slide, will then go long SLW.

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My revised Long Term Capital Management "Long Term Macro Trading" [LTMT] program.

 

I've sold my core GM holding of silver for US dollars. This silver had been a buy and hold investment which I no longer think is a good idea for silver [i had hoped to swap for gold with the ratio at 50 odd]. Silver might just remain volatile against the dollar, in a see-saw pattern for the next few years. I'll keep this large US dollar position with my broker. I do not mind staying in dollars as the dollar looks likely to continue strengthening n the short/ medium term. If we see another market crash a la Hoye, I'll only then pile into someting like SLW. This would be a "macro" trade and would look to cash in once SLW has recovered [looking for a repeat of the past year or two in SLW].

 

Gold is a different story, and obviously will be holding onto a decent gold postion at GM. I would only consider swapping to silver if the ratio completely collapsed to 80 or 90. Due to deflationary pressures and inflationary expectations, I think the ratio may range between 60 and 80. If I went to silver on a crash, I'd be quick to swap back to gold at around 60 on a recovery.

 

I'm also raising a reasonable dollar position at BV, and will look to aggressively trade silver for dollars there. With a good bullion position elsewhere, I'll feel free to wear my dollar bull hat, but will only trade occasionally and only on the large macro moves. I consider the BV account, where I'll trade silver for dollars, as a hedge against a large bullion position.

 

 

 

Put together a few ideas contrasting silver to gold here, and how they might relate to investing and trading:

http://www.greenenergyinvestors.com/index.php?showtopic=9211

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Stumbled across the ProShares UltraShort FTSE/Xinhua China 25, which apparently shorts Chinese stocks:

 

http://stockcharts.com/h-sc/ui?s=fxp&p...mp;g=0&id=0

[Check out the weekly chart]

 

Started to get interested... until I read this:

 

How Not to Short China Stocks

http://www.thestreet.com/story/10582899/1/...ina-stocks.html

Many investors seem to view the ProShares UltraShort FTSE/Xinhua China as a means of shorting this year's tremendous rally in China stocks. There are two main problems with this strategy. First, FXP shorts only Hong Kong-listed shares, which trade at much lower multiples than their mainland-listed counterparts and with a surprisingly low correlation.

 

Second, FXP shorts only the "FTSE/Xinhua China 25 index," which as it says is only 25 stocks. It is important to note that there is absolutely no way of shorting mainland-listed shares. Investors cannot short individual shares, and there are still no traded futures that would allow investors to short the indices. As a result, there are no funds through which investors can short the China market.

 

So it doesn't really short the SSE afterall. Any ideas for how to short China.... by proxy?

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So it doesn't really short the SSE afterall. Any ideas for how to short China.... by proxy?

 

Hi RH

 

Have been reading your diary on occasion with interest

 

See this article - then think carefully

 

Trouble with "geared" x2 / 3x type ETF's is as previously mentioned the time decay - these are really only for very short term trades ie a few days or so - even if the market goes with you over the course of a month it is still possible to loose money once up days and down days have been accounted for. The 3x are probably only good for day traders - that bad! You shouldnt loose more than your original investment sum but might well suffer the death of a thousand cuts, especially if repeating the excercise.

 

There are short ETF's that are not geared, not much of a time decay - they may be more suitable for hedging/investment more likely to operate on a 1:1 basis.

 

Trouble with trying to time the market for going short for investment as opposed to hedging purposes is...well timing ! You need a traders speed of action and understanding of how the various factors in & out of the stock markets interact. Something that I personally have not really bothered with / mastered.

 

On the other hand No6 has previously mentioned an approach of buying a stock, holding, selling out watching it drop and then buying in again. This is a much safer course of action as when you are out of the market the worst that can happen if you are in cash when it goes up. But you need to pay careful attention to the moves of the markets. The SLW/ / Royal Gold are probably not a bad place to start.

 

+ It helps if you know a bit about the companies fundamentals - then the danger is that once you have got to know and understand a firm like a SLW/ / Royal Gold - business model, potential etc, you might not want to sell.

 

Still if one is going heavily into gold/silver it probably does make sense to diversify into some decent stocks - the royalty companies are (I think) at the safer end of the market - there are also ETF's that follow the gold miners index and a newer one previously mentioned on GEI for junior miners which is likely to be a bit more volatile but give amplified returns as per Wanderers post.

 

The more more £ one has invested the more one can think about diversifying between different options.

 

Good Luck

D

 

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Thanks for that LD. Yes, no leverage for me, not with all the volatility.

 

What I'm looking for is to "macro" trade volatility. It would also be a hedging trade, not a long term investment... though it could turn into that. Say, I waited in dollars [this is the only currency worth waiting in imo] to buy something like SLW on a market crash, I'd want to sell on the recovery. I might also decide to keep some SLW as an investment. It does not really matter what the stock is, or even bullion related, the main factor is volatility. I liked the look of SLW because of the extreme price differential between the crash and recovery [any SLW owners reading this, keep in mind this is just a hedging trade to cover a possibility].

 

Another possibility is buying DOG [shorts the Dow] but probably a better one is buying the VIX... here's someone buying the VIX as a hedge against declining stocks [you could read bullion for stocks here as they seem to be highly correlated at the moment and would no doubt sell off a little in another bout of deleveraging].

 

http://thefreedomfactory.us/buy-vix-to-protect-market-gains/

Many investors, myself included, use VIX as a hedge on stock positions. When market volatility increases-usually when stocks are falling fast and fear dominates-VIX moves higher. To protect your stock investments a reasonable strategy is to buy long VIX. Stocks gets slammed, VIX goes higher.

 

Since 2001 the VIX has never made it far above 80, even during the dot-com crash and 9/11 tragedy. So when the index peaked at 80 in November it was probably not a good time to use it as a form of portfolio insurance. However, with the VIX back to within “normal” historical range, and even below the 200-day simple moving average of 44, we should once again be considering using the index as portfolio insurance.

 

http://stockcharts.com/h-sc/ui?s=$vix

 

The weekly chart shows the kind of thing I'm looking for. Much more volatile than the DOG. Two trades I'll consider is to buy the VIX shortly pre-crash, and then buy SLW post-crash. Trading these two sequentially would provide quite a leverage of sorts without being leveraged.

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The weekly chart shows the kind of thing I'm looking for. Much more volatile than the DOG. Two trades I'll consider is to buy the VIX shortly pre-crash, and then buy SLW post-crash. Trading these two sequentially would provide quite a leverage of sorts without being leveraged.

 

- looking at weekly settings indicates a short term time scale - are you happy with that / are you nimble enough !

 

Also does the VIX ETF work ?

http://www.businessinsider.com/the-vix-etf...isaster-2009-10

 

looking at the Vix ETF VXX - it does not look as volatile as the VIX itself ?

 

http://stockcharts.com/h-sc/ui?s=vxx

 

comparison here

http://bigcharts.marketwatch.com/advchart/...me=7&freq=1

 

still I could be wrong...

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- looking at weekly settings indicates a short term time scale - are you happy with that / are you nimble enough !

 

Also does the VIX ETF work ?

http://www.businessinsider.com/the-vix-etf...isaster-2009-10

 

looking at the Vix ETF VXX - it does not look as volatile as the VIX itself ?

 

http://stockcharts.com/h-sc/ui?s=vxx

 

comparison here

http://bigcharts.marketwatch.com/advchart/...me=7&freq=1

 

still I could be wrong...

"Weekly" settings is a bit of a misnomer on Stockcharts [perhaps my use of "volatility" is also]. The weekly setting shows prices stretching back for 2 odd years. I'm definitely not looking to trade short-term... but more long term on the large macro moves in the market. The idea is to stake a position when a stock/ ETF is relatively cheap, given normal market conditions, and to sell it when/ if the market liquidates. Looking at the weekly/yeraly charts I'd want to buy something that has fallen to at least 25% of its former value from 2008. That way, if a similiar event occurs it should appreciate by 400%.

 

I'll be doing some research into VIX relating instruments this week.....you would think there would be some instrument which directly matched the $VIX.

 

 

Also does the VIX ETF work ?

http://www.businessinsider.com/the-vix-etf...isaster-2009-10

 

looking at the Vix ETF VXX - it does not look as volatile as the VIX itself ?

 

http://stockcharts.com/h-sc/ui?s=vxx

 

By "volatility" I mean something that has shown a huge increase or decline in the medium/long term [i'm not a short term trader].

 

Actually, this ETF looks quite good for my purposes. If I'm to buy something pre-crash, I want to find something that looks absolutely terrible, something that is itself crashing as the market appears to be recovering. Then when the market crash resumes, this stock or ETF should retrace all the ground it previously lost. Remember, I'm not looking to buy something that looks to be strong and strengthening now, but something that looks to be weak and weakening.

 

 

http://www.businessinsider.com/the-vix-etf...isaster-2009-10

So how has the ETF VXX done in comparison to the VIX futures? In a word: HORRIBLE!! It hasn’t always been so. But in the last 3-1/2 months, the performance of VXX has been devastatingly bad.

 

On July 8, the VIX closed at 31.30, VXX closed at 74.40, and our CRVF [Constant Rolling VIX Futures] index closed at 31.37 (July futures at 30.80, August at 31.80). As noted above, last night the VIX closed at 24.83, CRVF closed at 24.98. VXX, however, closed at 43.18.

 

Do the math. VIX down -20.7%, VIX futures down -20.4%, VXX down a horrible -42.0%. And remember folks, this is not a double leveraged ETF portfolio. But it’s still twice as bad!

Perhaps I'm missing something here, but if the volatility in VIX lessens, you would expect an ETF tracking that volatility to lessen also right? [you'd expect the ETF to perform well, when the volatility increases]. So with VIX -20%, and the VXX down -42%, how is that so horrible? If anything it looks to be leveraging the VIX, which is exactly the kind of thing you want. Say the VIX went up 20%, VXX could well go up 40%! Buying this ETF, you'd want to buy when the VIX was at its lowest.

 

 

 

Some info on VXX here:

 

http://seekingalpha.com/article/117869-vxx...-buy-volatility

 

Before using these ETNs in your trading, you should understand the following:

 

These products do not track the popular VIX index, they track VIX futures. VIX futures often act quite differently than the VIX spot market. The S&P white paper provides additional light on this subject, as does a recent article by Don Fishback.

These products are ETNs, not ETFs, please consult additional information on ETNs.

Unfortunately, someone will not heed the warnings, and we will see articles claiming that these products don’t work because they don’t track the VIX.

 

Despite the drawbacks, the ability to “buy” volatility with an exchange-traded product has been eagerly anticipated. I expect this to be one of the most successful new ETF/ETN product launches of 2009 and pull in a large amount of assets in a relatively short time. Both started trading last Friday, and early indications are that traders prefer the VXX to VXZ. Nearly $15 million of VXX exchanged hands in the first three hours of trading versus $5 million for VXZ.

 

http://en.wikipedia.org/wiki/Exchange-traded_note

 

 

http://www.ipathetn.com/VXX-overview.jsp

 

 

http://seekingalpha.com/article/117694-fir...nd-vxx-movement

Absent any statistical analysis (coming next week), I would say that so far as today’s data indicates, VXX is an excellent though slightly sluggish (as expected) proxy for the VIX. All things considered, it is already the best trading vehicle for approximating the cash/spot VIX that has been brought to market.

 

 

This is of concern, from the original Don Fishback article"

 

https://www.donfishback.com/blog/2009/10/28...tility-product/

What’s interesting is that, since this apparently is the index upon which VXX is based, we can look back in history to see just how good or bad VXX would have performed in various market conditions, had it existed prior to January 30, 2009.

 

The index that mimics VXX is the yellow line; VIX is the green line. As you can see from this chart, had VXX been in existence three years ago, and had you been using it to profit from a rise in market implied volatility (a rise in VIX from 10 to whatever), you’d be left wondering, “Why am I in this thing?”.

 

SPVXAll_Large.jpg

 

Though I have to admit, looking at the yellow VXX line, I'm not sure why I'd be disappointed if I saw it go from zero odd to 100.

 

 

Good article here on the VIX and VXX:

 

http://www.etfexpert.com/etf_expert/2009/0...picking-up.html

So what if you think the current euphoria on the Street is overplayed? What if you're unimpressed with the so-called earnings surprises? What if you feel that the economy may not be mired in recession much longer, but that it sure isn't on its way to growing at a desirable pace? And what if you think investors will become more fearful soon enough?

 

There's an investment for that! The iPath S&P 500 VIX Short Term Futures (VXX) goes up when the level of fear in the marketplace goes up. Indeed, a contrarian investor might be tempted to purchase VXX today if he/she feels the market could become very "choppy" or if he/she simply believes that the CBOE Volatility Index is bound for a few up months. After all, it has gone down each month since March of 2009.

 

In truth, it's hard to say that VXX is actually representative of complacency simply because it is 50% lower than the bear market bottom in March. Again, with the CBOE Volatility Index at 25, we're a far place from the complacency of 10. What's more, there's little technical evidence that investing in VXX is anything but an effort to catch the falling knife.

 

That said, the average daily volume on VXX has doubled from the last 3 months over the original 3 months since this investment's inception. It follows that iPath S&P 500 VIX Short Term Futures (VXX) could, if nothing else, serve as an effective hedge against a worried investing public going into infamous October.

 

This was written July last year when VXX was at 60. It is now at 27! Can't be a very fast falling knife... surely. :lol:... and it would be a medium long term trade, so even if it fell a little lower, it would be of little concern.

 

VIX is now 20.

 

I still like the look of VXX, considering it was at 120 [2009] and is now at 27:

 

http://www.bloggingstocks.com/2009/07/30/e...folio-risk-vxx/

When the market was crashing earlier this year, for example, VXX was trading up to 120. Today, its been below 60, showing the relative complacency of investors as stocks move up. But what if we have a couple bad trading days? What if the S&P goes back below 900? The VIX is going to go up as people panic, and VXX will trade up with it.

 

And this from yesterday:

 

http://etfdb.com/2010/daily-etf-roundup-xl...ontinues-slide/

The biggest loser in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which finished the day down 2.8%. The morning’s CPI reading gave investors hope that coming months won’t be as volatile as previously expected, given the expanded arsenal the Fed will have to stimulate the economy. VXX has had a very rough 2010, losing more than 20% since January 1st.

 

VXX is already down almost 20% on the year, and has lost more than 70% over the last 52 weeks. The VIX is currently trading near 52 week lows as expectations for a smooth first quarter continue to be solidifying among investors.

 

Perfick.

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Our Love-Hate Relationship with the VXX

 

January 18, 2010 | about: VXX

 

http://seekingalpha.com/article/183012-our...ip-with-the-vxx

 

Now let's take it one step further, because there are clearly complexities with the VIX options and futures. What about just buying SPY puts? That is even simpler. And, as it turns out, unless there is a HUGE increase in the VIX, they actually perform better. The February SPY puts were up 50% in value, while March puts were up more than 30%.

 

VXX isn't a bad instrument, but it is complicated--and you'd better read that prospectus. Although I love the VIX options, the January case study provided more proof that most people are better off learning the simple art of buying SPY puts and doing just that.

 

What I've picked up so far is that there is better instruments than VXX available for short term traders. I'm not looking to trade short term, but to buy, hold and then sell on a large macro move where we could see a huge increase in VIX and a complete reversal of VXX.

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http://www.benzinga.com/107833/trade-5-long-vxx

Market-neutrals, as measured by the Highbridge Statistical Market Neutral Class A (HSKAX), have risen substantially in January, marking a possible end to the massive quant prop delta hedging that drove equity cash demand in 2009. If that is the case, and 1987 is an appropriate analogue, volatility is set to surge as assets decline in tandem with each other. Given the Treasury’s desperate funding mismatches, and the rush into USD and Tsys that occurs with asset declines (particularly after USD-funded carry trades across all risk asset classes driving demand), one could argue that the US government and Federal Reserve are incentivized for such an occurrence. Not to say they will cause or catalyze it, but “don’t fight the Fed” is a mantra I take quite seriously.

 

The VIX spent the majority of the second half of 2009 trading under 25. With such low volatility, demand for equity indices and single names from delta hedging clearly diminished into year-end, though many of the momo strategies essentially chasing market chasers (dynamic hedging dealers) probably continued buying.

 

We are now at a turning point where the USD is rallying, risk assets (including equities) are selling off, and vol is increasing. The potential for volatility expansion is quite large, given today’s liquidity landscape and the imminent unwind of the positive-feedback loop from delta-hedging short-bullish gamma books into a statistically significant rallying market.

 

Indeed, vanilla money has chased the delta hedging (out of necessity), as signified in the below graphs from Sentiment Trader. Crowded trades of this nature lead to explosive positive-feedback unwinds. Essentially the entire equity universe is caught in a momo trade chasing a demand driver that is now reversing. This should increase vol.

 

In addition, as Richard Whalen of Institutional Risk Analytics suggests in a recent article, the Fed’s acquisition of duration risk with its MBS purchases has suppressed market volatility by masking the negativity of OAS spreads net of Fed asset purchases. When the shoe drops, a rush to hedge may prove the VIX at current levels to be under-representative of current prevailing risk as well as undervalued.

 

The VXX ETF isn’t the best proxy for the VIX, but it is a nice trading vehicle, especially from a chartists point of view. Still in its declining channel, but a possible bull flag is developing. Most likely will be going long around $32.

 

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more charts here maybe?

 

(worth a thought?)

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more charts here maybe?

 

(worth a thought?)

Volume is picking up quite a bit, co-inciding with the dollar rally. VXX at 20 and VIX around 15 could be a good buy.

 

vxx.gif

 

 

s_p_index.gif

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vixxxx.png

 

 

 

vxxxxx.png

 

 

Comparing the VXX to VIX you can see the reason for some complaints from day and swing traders looking to capitalize from volatility.

 

Being a position trader, this does not concern me too much... though I am concerned to try to get in at the bottom. I'll be watching for the MACD to cross the signal line, then move into positive territory, and then stay there a few days before buying.

 

 

 

Longer term VXX

 

longvxx.png

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My revised Long Term Capital Management "Long Term Macro Trading" [LTMT] program.

 

I've sold my core GM holding of silver for US dollars. This silver had been a buy and hold investment which I no longer think is a good idea for silver [i had hoped to swap for gold with the ratio at 50 odd]. Silver might just remain volatile against the dollar, in a see-saw pattern for the next few years. I'll keep this large US dollar position with my broker. I do not mind staying in dollars as the dollar looks likely to continue strengthening n the short/ medium term. If we see another market crash a la Hoye, I'll only then pile into someting like SLW. This would be a "macro" trade and would look to cash in once SLW has recovered [looking for a repeat of the past year or two in SLW].

 

Gold is a different story, and obviously will be holding onto a decent gold postion at GM. I would only consider swapping to silver if the ratio completely collapsed to 80 or 90. Due to deflationary pressures and inflationary expectations, I think the ratio may range between 60 and 80. If I went to silver on a crash, I'd be quick to swap back to gold at around 60 on a recovery.

 

I'm also raising a reasonable dollar position at BV, and will look to aggressively trade silver for dollars there. With a good bullion position elsewhere, I'll feel free to wear my dollar bull hat, but will only trade occasionally and only on the large macro moves. I consider the BV account, where I'll trade silver for dollars, as a hedge against a large bullion position.

 

 

 

Put together a few ideas contrasting silver to gold here, and how they might relate to investing and trading:

http://www.greenenergyinvestors.com/index.php?showtopic=9211

 

just out of interest, what price did you sell your silver at?

 

 

 

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just out of interest, what price did you sell your silver at?

Sold for around $15.50. The bulk had been bought at around 12/ 13/ 14 dollars... so all up at least broke even.

 

I probably could have stayed in it until we saw 17 or 18 again, but I decided to get out of silver [as a long term core position] as - being a deflationist - I came to the realisation that there was just too much risk hanging over it. This was confirmed for me when it broke it's long term support. I put together a thread on this at the time. Actually, looking back, I was speculating on silver... that the ratio would go to 55 or 50 and I could then swap to gold. I will stick to buying gold in the future when "investing" and when speculating look to do something like the above posts outline. I don't think silver is a substitute for gold, which looks to me a lot safer.

 

I still have a good core of gold which I won't be selling come hell or high water. When selling my core holding of silver at GM, I also bought a lesser amount at BV to trade for dollars.... will look to sell this when silver gets to 18/ 19. I feel more comfortable swapping for dollars at BV as there is no uncertainty involved with sitting on dollars for a long period of time, and this is a lesser amount involving speculation not buy and hold. I will still bother to speculate a little with silver/ dollars because, who knows, silver may eventually explode to the upside in a few years time. But in the meantime the volatility should be traded. My targets will be to sell at 18/ 19, buy at 11/ 12 or so, and to not bother with intermediate moves.

 

I still think silver is an interesting commodity currency to own... but imo it needs to be bought at lower prices... with dollars.... when the tide goes out.... and then traded back to dollars when the tide comes back in again. Silver surfing.

 

 

Silver-Surfer-fantastic-four-245031.jpg

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The SPX seems to/may be tracing out similar fractals to silver, lagging by about 5 days. retracing in a triangle, testing upper resistance. Maybe a pop above and then down for the SPX?

 

On the other hand I am getting bored with the markets consoldation and looking at charts too much.....

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The SPX seems to/may be tracing out similar fractals to silver, lagging by about 5 days. retracing in a triangle, testing upper resistance. Maybe a pop above and then down for the SPX?

 

On the other hand I am getting bored with the markets consoldation and looking at charts too much.....

Yes, no point trying to time, or chase a market in the "twilight zone". At some point, it will have to give ...and much better to stake out a position to take advantage of that. Stake a position, then go fishing :lol:. This is why I'm looking at VXX at the moment. I'm also thinking treasury bonds are in a long term bull [shock/ horror Hendry might be right] and could be good to look at. Say at some point investors get worried, yields rise, bonds get cheaper... could be a good time to buy.... for when the bull in bonds reasserts itself.

 

And of course an FX pair such as Aussie/ Dollar. All medium long term position trading of course with no more than 2:1 leverage... if that. Both momentum oscillators suggest short Aussie/ long Dollar is a good bet.

 

 

aussie-2.png

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dollar-21-4.gif

 

 

U.S. Dollar Entering Consolidation Phase

 

http://www.marketoracle.co.uk/Article17397.html

The weekly chart of the US dollar index is shown below, with upper 21 and 34 MA Bollinger bands in close proximity to the index, suggestive that further upside potential is probable. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K above the %D in 1 and 2 and beneath the %D in 3. Although the %K in stochastic 1 is toppy, the %K in stochastic 2 is still in its infancy with respect to a potential advancement. The USD is likely to consolidate over the next 6-8 weeks before breaking out, so keep this in mind with investments. The weekly chart for the USD remains bullish 4 to 6 months out.

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vxxxxx.png

 

vixtod.png

 

How low can this thing go? Signals continue to look bearish. Though looking oversold on RSI, it has remained so for a while on previous occasions.

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swing.gif

 

If we see another 2008 style round of deleveraging, silver could go low. I'm only swing trading silver [for dollars] and will be looking to sell at around $18.

 

 

 

sil.png

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goldyen.gif

 

 

silveryen-1.gif

 

 

If one wanted to tarde a little gold here, Yen looks to be the currency of choice. If the deleveraging and recovery pattern repeats it would represent a 50% gain [in the accumulation of ounces].

 

 

Swing trading silver looks best in dollars. Either is good as the other to accumulate imo [in the short/ medium anyway].

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gldwk.gif

 

Gold is showing some weakness here having declined $40 even though the dollar has not shown much strength. Previously it required the dollar to strengthen for gold to decline a little. Could be some good buying ops soon.

 

Momentum looking on the down side. I'll be averaging in with income this year at the end of each month. I also hope to buy a decent position in VXX shortly as both a hedge and a position trade for lower gold prices should we get a Prechterite collapse in the market.

 

dg-2.png

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The bear's best friend

 

http://www.theglobeandmail.com/blogs/marke...article1497697/

If you want to make sure you don’t suffer another stock market meltdown like the one we saw throughout 2008, here’s an interesting way of protecting yourself: The iPath S&P 500 VIX short-term futures exchange-traded fund (VXX-N24.080.190.80%).

 

It has been around for more than a year, but has begun to look increasingly attractive as the price has fallen. And now, as Bespoke Investment Group pointed out, the volume of trades has spiked from an average of 929,000 units a day in 2009 to an average of 6.5 million units a day this year – suggesting that interest is rising.

 

Why does it appear that more investors are growing interested in this market hedge? The VIX ETN tracks the VIX volatility index, which tends to spike when investors grow nervous about the direction of the S&P 500 – hence, the index’s reputation as a “fear gauge.”

 

The VIX sat at about 20 in August, 2008, when the stock market was on the threshold of some truly disturbing times. It then shot up to a record high above 80 in October and November of 2008, when many feared that Wall Street was imploding and no one had a clue how low the S&P 500 would fall. With better times over the past year, the VIX has begun to decline again, falling to a low of 18.6 on Thursday.

 

The VIX ETN has more or less followed these moves, spiking to a high of $119.38 (U.S.) in February, 2009. It fell to a low of $23.55 this past Monday. In other words, it has moved in the opposite direction as the stock market.

 

You can see where this is going: If you have a skeptical view of the market’s remarkable recovery over the past year, you could direct some money into the ETN in anticipation of another spike in fear among investors.

 

There is a risk here, though. While the VIX index has fallen precipitously from its highs, history suggests that it can still fall further. Between 2003 and 2007, when no one could envision a recession, let alone the failure of a major U.S. financial firm, the VIX regularly fell to a low of 10 – or well below its current level.

 

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vixtod.png

 

How low can this thing go? Signals continue to look bearish. Though looking oversold on RSI, it has remained so for a while on previous occasions.

 

Hiya RH, did you get involved in the VXX etf? I think i'm going to buy in....

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I know SB's are not your thing (nor mine) RH but this happened to pop into my inbox while checking your thread

 

http://www.fleetstreetinvest.co.uk/spread-...-vix-01011.html

That could be one way to do it. You have to wonder how low the Vix can go. Even if Vix just grinds lower for the year, and VXX with it, I won't be too concerned with nominal losses as it will be a hedge and position trade.

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