Trading Psychology
Understanding Market Trends
By Rick Rouse
Aug 17, 2008 - 8:19:01 PM

It's important to notice trends and ones that develop.  Gold was headed for $1,000 an ounce it is now trading for under $800 an ounce. The 20% drop has happened in just six weeks. On July 1, gold was going for $940. Now mid-August it is trading at $792. There is support for gold at $770-ish, but a break below $770 could take the precious metal down to $750.  When the market was going lower, gold was going higher.  The trend developed quickly.

Meanwhile, oil is down 25% from its high of $147 a barrel as it is going for $113-$114. I had mentioned in our daily blog the $110 level as a battle line and I'm in the camp of oil going back to $120 before it tests the $100 level.  The market has gone higher once oil headed lower.  The key here is if the market goes higher if and when oil oil heads back to $120. 

Then there is the dollar. In dollar has hit a six-month high versus the euro as the currency is down to $1.47.  In other words, one euro is worth $1.47 in U.S. dollars.  The dollar has gained 5% this month and continues to rally as inflation will restrict the Fed's ability to cut rates. The weaker growth in Europe has started to hit the euro hard and it could get worse before it gets better for the euro.

A firmer dollar typically pressures gold which is often seen as an alternative investment or safe haven to the U.S. currency. A stronger dollar also makes dollar-priced commodities more expensive for holders of other currencies. They work hand-in-hand and it's good to know these things.

When the market was tanking in early July and oil was rising, we were able to hop into the gold stocks listed in the blog for a quick bullish play on gold. We set stops, made money and got out.

The financial stocks are like a yo-yo.  They are good for trading but they can be tricky.  Their trends change quickly and they will become super cheap again. 

It will be interesting to see if the market can hold its recent rally if oil heads back up. Over the short-term, I still see a firmer dollar and lower oil prices. This means the outlook for gold remains cloudy.

Rick Rouse
Rick@OptionsMentoring.com