I have a myriad of rules and strategies I follow with my money. Each one of them has been put to the test over the past few months. Some of the signals that used to work have becomes run over by the freight train we call credit. Other signals, once considered unreliable, have become very accurate in predicting market direction. Like the model, the markets have been equally screwy with crude trading in line with stocks and the dollar trading with a negative correlation to the S&P. The long bond is being run higher in price (lower in yield) and very few understand why. And while this soup is cooking, the US government is buying AIG (AIG), Freddie Mac (FRE) and Fannie Mae (FNM). Irrational trade rules supreme - and this soup is far from plain tomato.

So as this far from plain market chops around, it makes it hard for anyone to find out what the overall direction of things is. For example, the dollar has screamed higher even as the US government takes on more and more risk from the financial markets. The Yen was the strongest global currency even with overnight rates around .30% and deflation setting in. The Euro, overly extended in the 1.50s, has corrected more aggressively than I could have ever imagined. And as the Bank of England attempts to stem the decline in the Uk Economy, it appears the market is saying that the decline will be much worse than many believe.

As we proceed into the winter season, as far as refiners are concerned, the focus will shift from the unleaded gasoline inventories to the residual fuel or heating oil [HO] inventories. When the winter is expected to be a warm one, sort of like what we saw the last few years, HO demand is less than the norm and prices for this product generally lag the price of the crude barrel (crack spread favors crude). When the winter is expected to be a cold one, refiners prepare for the rise in demand of this product. So when things are expected to be warm, lower demand is expected....cold, higher demand is expected. Simple, right?

Well, what happens when the expected does not occur? Two things. First, when the cold sweeps through and is unexpected, more heating oil is used, driving inventories lower until the refiners bring the level back on-line to where supply and demand meet. This drives the price higher rather quickly. Over the past few years with the warmer than expected winters, the price of heat has been leveling off before the winter really picks up. Basically, the months of October and November have determined the action for the rest of the winter for the price in heating oil.

What has been interesting about this dollar rally has been what the waves have done in destroying the rallies in the other major currencies. For example, from the double top in the Euro around 1.60 and the double bottom in the USD around 71.70, several currencies have been pummeled lower. The Aussie dollar, suffering from overtight policy, has been crippled by almost 20% from the highs. This is a currency we are talking about by the way and not a tech stock. The British Pound, another currency suffering from an overtight policy, also has taken a beating lower, falling almost 14% lower. Lastly, the Euro has backed off by about 10% - it too also suffering from  an overtight policy.

On the other side of the ledger, the Canadian Dollar, which has been tracking crude somewhat closely, is trading decently for the most part as the Bank of Canada [BoC] has been maintaining policy somewhat easy relative to its fundamentals. The Bank of Japan, the current proud member of a government in disarray but also featuring an easy policy mandate, has seen the Yen hold up well globally. Lastly, the good old greenback, the one that every bear has come to hate and blame for the current blow ups globally, also features ultra-easy policy.

It's no secret that the housing market is weak. Sales are coming but at greatly reduced prices. Builders continue to put up the "million dollar castles" in cities nearby which has confused me. Financing is tough these days though available at much higher rates. Crude prices are lower but the price of unleaded has not completely unraveled... at least not yet. The unemployment rate has been moving higher and job creation is basically nil with my own models showing that job creation at its weakest since June of 2003. Lastly, the realtors of today look like the stockbrokers of the bubble era - they went along for the ride and now don't know what to do when the "ride" blows out a tire. So with all of these negatives in play, why are we seeing the homebuilders rally?

Now this is no ordinary rally. There have been squeezes in the past but those squeezes were isolated and not accompanied by other securities - in this current case, the greenback. The bears have been out on the dollar but moreso of late on the housing market. The reasoning behind such has merit but the homebuilders have continued to climb. One of my trader friends, who has been doing this for 30 years, often says that at market lows, the next leaders are born. We saw that in 2002 when the basic materials were the first off the lows. We saw that in the late '90s with the techs accelerating to the upside. Could 2008's low candidates, the financials and the homebuilders in this case, be the next leadership? Could they be telling us that perhaps credit conditions are now in place for housing to stop falling?

Wednesday was an interesting day in the crude pits. First, the market opened substantially higher and crude moved straight up till the 9mm build of crude was announced by the DOE at 10:35am. Then it proceeded to have a $4 reversal over the course of the morning - then it rallied into the close. In between, there were many stories being thrown out there but one that I should have noticed had to do with the idea of support. Support, as most know, is a point where the buyers are stronger than the sellers and prevent sellers from taking the price lower. On the weekly chart of the crude contract, 111.50 is that level. As you can see from the chart, there is a double bottom there. Furthermore, this is occurring while crude is deeply oversold. Result: Perhaps a solid bounce higher...and not the plunge I was looking for.

At the same time, there are a few things working against crude. First, the aforementioned dollar versus gold model has turned into the favor of the dollar. Over the past 20 years, when this has occurred, crude has underperformed and in most cases, backed off toward the lows. Now that is not to say that crude moves down to the $30 barrel level. It does indicate though that the road higher will be difficult and paved with bearish stories. One of those bearish stories, could be the energy report from the morning.

I have always found the grain markets a "great futures market." When I say that, I am talking about the people who operate within it, the price discovery that goes on and the knowledge that many of these traders have. Now, price discovery might be too nice, but the other two factors put these guys/gals near the top of their profession. Each time I have traded these markets, the broker on the floor has been more than willing to give me a little insight on the insanity that has been occurring. That insanity has included a wheat price spike in March and a corn/soybean price spike in July. These limit up and limit down moves have created enough heartburn that has caused a limit up move in Zantac to cure it. Thankfully, I have not been on the wrong side of a limit up move (or limit down move for that matter). Call it luck or whatever it might be.

Anyhow, I was discussing the grain market futures with a trader at the board and something struck me funny in the conversation. Iran has been a big buyer of our wheat this year (vs little or no buying last year). Yet, we sit there and argue with them about the nuclear ambitions. This tells me that perhaps we are not that serious about Iran and nuclear weapons - either that or the farmer in this country controls the decision making. Anyhow, aside from this, in our conversation, two things outside of this Iran news had me go back to my drawing board. First is the effect of a strong dollar and second is the Baltic dry index.

My bullish call behind the dollar has been based on many factors. One factor, however, that I did not take into account is the action in the British Pound.

Sure, I track the overnight rates of the UK economy and where fair value of that target should reside but generally speaking, I have kept my comments to the Euro. But as I reviewed my notes yesterday and the charts of the currencies, I noticed something that was quite interesting. First, things technically are breaking down for the Pound. Second, the UK economy is suffering much more than the US economy at this juncture. In between, the Monetary Policy Committee [MPC] of the Bank of England is stuck as rising inflation and falling growth are accelerating from a spread perspective - the proverbial rock and a hard place.

So here we are, crude oil sitting under the major $120 level. I had a discussion the other day with a person who has been bearish on crude all the way up from $70. The argument was just about the fundamentals of the market and the falling level of demand. I argued that such sometimes comes into play but for the most part, these numbers tend to lose you money trading these market - not make you money. Anyhow, the person went away all angry that I did not agree with him. My reasoning was somewhat simple: The crude market has not convincingly crushed the $120 level. If it did, then I would be calling a top but since the buyers have showed up, and the technicals overall somewhat support a move higher, I just don't think the cascade is there yet.

However, it could come to the party soon. To measure crude oil, I look at the commodities and the US Oil Fund (USO). I am not a big fan of the USO as the constant rolling of crude can distort the price action of the fund (lagging or leading it depending on the shape of the crude future curve). However the USO is useful because it provides me with a view of the retail investor's thoughts via the volume figures. Combining this together with my futures chart and economic outlook, I can reasonably come to a view on crude. So where do I think things are going from here?

I figure this article upsets the apple cart in the gold bug community but, gold is worth looking at. After all, if it rallies or falls, someone is talking about it, various stocks and sectors respond to it and enough chatter follows. On Friday, it came very close to breaking a major, major, major support but bounced.

So the question is: where does it go from here? Well, let's analyze this technically, like I did with crude the other day. Before we begin though, the process that I use to determine golds trend is threefold: First, from a day to day trading perspective, second, from a long term chart perspective, and third, from an inflation perspective.

Over the past few days, we have seen an massive unwind of long energy, short financials, long commodities, short stocks, short dollar, long....well every currency versus the dollar. The selling has been brisk and aggressive and traders, much like the days where the Yen was the carry of choice, are fretting an environment where the dollar is strong and everything else is weak. Are traders jumping the gun early on this? Well, 3 things of my models are on the cusp of moving higher for the dollar.

First, technically, things are looking like something is about to happen. The dollar index is very close to breaking back above the 73.95 range level on the long term chart. A successful close above this level at month end would be the first since the spring. It would also confirm to me a double bottom of sorts around the 71.70 level. Using straight projection analysis, this implies a move towards the 77 level, which in turn argues for the Euro to end up somewhere in the 1.45 area. Shifting to the weekly, the same setup is seen in terms of the projection but the next major range level I show is near 82 or roughly 1.20 in the Euro.