Over the past few months it seems as though everything has been tied to the dollar. Simple inter-market analysis makes it obvious that almost everything in the financial market eventually has an affect on stocks and commodities in some way. But recently trading has really been all about the dollar. If you watch the S&P 500 and gold prices, you will notice at times virtually every tick the dollar makes directly affects the price and direction of gold and the S&P 500 Index. 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 the dollar about to rally and reverse trends or was Friday’s pierce of the October high just a shakeout before the next leg down? Back in late August the dollar pierced the July high on an intraday basis (shakeout) 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. Gold and the dollar are almost inverse charts when comparing the two. 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. 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 breakout 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. 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 breakout 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. In short, I feel the market is at a critical point which 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 defensively is the only way to play right now. That means trading small position sizes. Right now I am trading 1/8-1/4 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 expensive and stressful.

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