From the Desk of Ian Culley @IanCulley

King Dollar is bouncing around as we approach Labor Day.

Last week’s strength is evaporating.

Meanwhile, global currencies claw back recent losses as cryptocurrencies and gold’s crazy cousin, silver, enjoy a much-needed boost.

It’s no secret that risk assets like a weaker dollar! 

But let’s put the current action into perspective before we get ahead of ourselves.

Remember, a single session doesn’t constitute a trend.

But it could mark a critical turning point…

The US Dollar Index $DXY violated a year-to-date downtrend line last week, breaking above its June pivot high:

And it did so while posting its first overbought reading (14-day RSI above 70) since its peak last fall.

From the Desk of Ian Culley @IanCulley

I’ve had the pleasure of driving cross country multiple times, covering every inch of I-10. 

I made so many memorable moments on those drives …

I pushed through white-out conditions in Kansas. (My brother had an appointment with the State Department in Washington D.C., and we couldn’t stop.)

I "accidentally" crossed into Juarez, Mexico, which turned into one helluva time!

And I picked up more than one speeding ticket on the reservation (highway patrol doesn’t play in Navajo country).

I somehow made it coast to coast every time.

While many details of those treks slip away with the years, I’ll always remember the Alamo.

I know, it’s funny. I didn't even go inside.

To be clear, my memory of the Alamo has nothing to do with the historic battle or the revisionist histories that have been written and rewritten since.

Instead, I picture a meager fort in the twilight – nothing more. A truly humble beacon of strength.

The understated image resurfaces in my mind's eye this week as I plan and plot the best way to trade gold.

From the Desk of Ian Culley @IanCulley 

“Looks like cocoa and sugar are poised to break out.” 

That’s the first message I saw on my phone this morning as traders across the US were preparing for the upcoming session.

But I wasn’t ready to get behind a tactical move in either cocoa or sugar.

Instead, my full attention rests with one commodity on the precipice of an explosive rally…

Cotton.

Check out the weekly continuation chart of cotton futures:

My eyes have been fixated on cotton since early February.

From the Desk of Ian Culley @IanCulley

I bought bonds last December and again in March.

I thought it was time to bring these beaten-down assets back into the fold as US Treasuries printed fresh six-month highs.

But I was wrong. 

Fast-forward to today, and the downtrend for bonds remains intact.

And those false breakouts last spring have led to fresh breakdowns as we head into the fall.

The 10- and 30-year futures are flashing sell signals as they undercut their respective March pivot lows.

Now, the shorter end of the curve is doing the same.

Here’s the two-year Treasury note completing a bearish continuation pattern:

From the Desk of Ian Culley @IanCulley

The US dollar sits atop the heap.

Major global currencies, including the Australian dollar, the New Zealand dollar, the Japanese yen, the Canadian dollar, and the Singapore dollar, are limping lower against the greenback.

The long list could grow in coming sessions as momentum builds behind a sustained USD advance.

While the evidence suggests we lean in that direction, I always prepare to take the other side of a trade if and when the data changes.

So, what’s the best way to play a falling dollar?

Before I share my favorite trade setup, let’s look at the US Dollar Index $DXY: 

DXY is finding resistance at the July pivot highs and a downtrend line originating with the March peak.

From the Desk of Ian Culley @IanCulley

Gold is hanging on for dear life.

Rising interest rates and a strengthening dollar create formidable headwinds for the shiny yellow rock.

I remain optimistic for the entire precious metals space, but hope is not a viable trading strategy – especially if gold undercuts its 2011 highs.

Some gold bugs may find it difficult to accept, but gold’s a short if and when it decisively closes below its prior commodity supercycle peak.

And it’s trading back at those former highs today…

From the Desk of Ian Culley @IanCulley 

We like buying energy.

Who doesn’t? 

Energy stocks are resolving higher and holding their breakouts, something few market areas can claim this quarter.

It makes sense.

Interest rates are rising across the curve as the US 10- and 30-year yields eclipse last year’s high.

Procyclical commodities and value-oriented stocks are responding as they tend to benefit the most as yields climb.

And when we add a dash of stock market rotation – bam! 

Energy-related assets are making contact!

But while rates continue to rise and energy names are ripping, crude oil has not been able to break out…

Check out the daily chart of crude oil futures sliding back within its prior range:

From the Desk of Ian Culley @IanCulley

Credit spreads are the canaries in the financial market coal mine.

They’ll peep at the first sign markets face serious risks.

With stocks entering a corrective phase, it makes sense to seek information from the biggest exchange in the world.

The bond market.

Credit spreads remain tight despite increased selling across US equities.

That’s the opposite of what I’d expect during a severe selloff.

What does that tell us?

Check out the overlay chart of the Russell 2000 ETF $IWM with the high-yield credit spread ratio, $HYG/$IEI:

We’re having loads of fun with What the FICC?

Spencer and I talk about high-level intermarket trends, whatever markets catch our attention, and things that fly under the average investor’s radar.

Bill Baruch, the founder and president of Blue Line Futures, will join us tomorrow to share his insights on trends and markets.

I’m a big fan of Bill’s and the entire team at Blue Line – a consistent source of clarity. And I know Spencer’s dying to discuss yields…

It’s going to be a good one! Be sure to tune in tomorrow at 11:30 a.m. ET.

If you missed yesterday’s show, here’s a quick recap…

From the Desk of Ian Culley @IanCulley

When it rains, it pours.

Markets chop sideways most of the time. This has been the reality for forex markets for much of the year.

But that’s starting to change as numerous US dollar pairs reach new 10-month highs. The dollar is taking down crucial levels while the US Dollar Index $DXY retests a year-to-date downtrend line and key former highs.

The peculiar coincidence sets up some potentially critical resolutions for these USD pairs.

If they fail, the dollar rally is likely over. 

If they hold and additional USD breakouts materialize, selling pressure will intensify for many risk assets.

As of today, quite a few forex pairs are on the verge of supporting a sustained US dollar rally…

Let’s start with the second largest component of the DXY (13.6%), the US dollar-Japanese yen:

From the Desk of Ian Culley @IanCulley

One of my favorite scenes from "Forgetting Sarah Marshall" is when we get to meet the in-house surf instructor, played by Paul Rudd.

Rudd’s character, Chuck, a transplant local, imparts sage advice, “When life gives you lemons, just say f@&k the lemons and bail!”

I always laugh at that one, even as I write this note.

That’s probably because  I’ve spent the better part of the past twenty years chasing waves – but I don’t share this Hollywood version of a stoner-surfer ethos regarding life.

But I do follow this mindset when it comes to markets…

From the Desk of Ian Culley @IanCulley

Energy contracts are breaking out.

Crude oil and gasoline futures are completing major reversal patterns.

Heating oil is ripping higher.

Natty gas has traders on the edge of their seats (what’s new?) as it heads into a seasonally favorable stretch.

But what about the rest of the commodity space?

Check out the overlay chart of our equal-weight energy index and our equal-weight broad commodity index:

Both averages have followed the same path since the 2020 lows despite a mere 15% weighting toward energy in our broad commodity index. 

But energy is pulling away. Oil and gas names are taking on a leadership role among US equities as their underlying commodities confirm by digging in and resolving higher.