Lately, it’s all about the Benjamins. Over the past few months, the S&P 500 (SPX) and gold prices have been tied so closely to the U.S. dollar that, at times, virtually every tick the greenback makes directly affects the price and direction of gold and the SPX.

Let’s take a look at some charts to see the underlying trends and what they are telling us.

Dollar Index Daily Chart

As you can see, the trend is clearly down. Currently the dollar is trying to find a bottom as it bounces and pierces the previous high. The question everyone wants to know is if the dollar is about to rally and reverse trends, or was Friday’s pierce of the October high just a shake out before the next leg down?

In late August, the dollar pierced the July high on an intraday basis (shake out) just before prices dropped sharply. I think this could very easily happen again, but when you see what gold volume is doing, it’s a different story.

Those who follow me closely know I focus on trading with the underlying trend, but manage my risk by trading smaller position sizes when the market has more uncertainty than normal, which is what we are currently experiencing.

GLD Daily Chart

Gold as measured by the SPDR Gold Shares (NYSE: GLD) and the dollar are almost inverse charts. Gold happens to be testing a key support level and it’s going to be interesting to see how the price holds up going forward. The one thing that has me concerned is the amount of selling taking place. The chart shows heavy volume selling and could be warning us of a possible trend change in the dollar, gold, oil and equities in the coming weeks.

Again, the trend for gold is still up, so I would not be trying to short it at this time; rather look to buy into dips until the market trend proves us wrong. That being said, with the selling volume giving off a negative vibe and the fact that gold has rallied for such a long time, any new positions should be very small.

Crude Oil Daily Chart

Oil looks to be forming a possible cup-and-handle pattern. If the dollar continues to consolidate for another one to three weeks and breaks down, then we should see the price of oil trade in the range shown on the chart and eventually break out to the upside. I have a $95-$100 price target on oil if the dollar continues to trend down. Until we see some type of handle form here, I am not trading oil.

SPY Daily Chart

On Friday, the equities market looked to have had one of those days that spooked the herd. The price dropped triggered protective stops with rising volume. I was watching the intraday chart as the S&P 500 broke below the week’s low, and this triggered protective stops, which can be seen on the one-minute charts. In an uptrend, I prefer watching stops get triggered because it means traders are getting taken out of long positions and most likely looking to play the short side. When the masses become bearish on the market, that’s when I start looking to play the upside in a bull market (buy the dip).

The SPDR S&P 500 (NYSE: SPY) chart above clearly shows the days when the shake-outs/running of the stops took place. Most traders were exiting their positions and/or going short because the chart looked bearish. One thing I find that helps my trading is that if the chart looks rally scary (bearish), then I start looking at a shorter-term time frame for a possible entry point to go long using price and volume analysis.

Market Trend Trading Conclusion

In short, I feel the market is at a critical point that will trigger a very strong movement in the coming days or weeks. Because the dollar, gold, oil and the equities market have had such big moves, I think trading VERY DEFENSIVE is the only way to play right now. That means trading small position sizes. Right now I am trading one-eighth to one-quarter of the amount of capital I generally use on a trade. Meaning if I typically put $40,000 to work, right now I am only taking positions valued at $10,000.

Remember not to anticipate trend reversals by taking a position early. Continue to trade with the underlying trend with small positions or skip a couple setups if you feel strongly of a possible reversal. Once the trend reverses and the volume confirms, only then should you be playing the new trend. Picking tops can be stressful and expensive.

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