All Eyes on the DXY

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We have officially entered the period known as "the dog days of summer". For the markets, this means light volume and low interest as carbon-based traders look for one more holiday before autumn and the drive toward year end.

At TFMR, we've always defined the "Dog Days" as the period between the first Friday of August and the Fed's annual Jackson Hole meeting three weeks later. This is the primary period when European traders take their annual holiday and U.S. traders try to squeeze in one more vacation before summer ends and school starts.

During this period, trading volume wanes as human traders exit the building. However, the HFT algos don't take vacations and they keep doing their thing 24/7, regardless of the calendar. This exposes the COMEX precious metals to sharp volatility that is strongly influenced by moves in the key inputs that those HFT algos are programmed to monitor.

As it relates to the COMEX precious metals, the single most important HFT input is the U.S. Dollar Index (DXY). On days when the algos "see" upticks in the DXY, they respond by selling or shorting COMEX gold and silver. On days when the DXY is down, the opposite occurs and, if you monitor this closely, you'll see that the inverse correlation is very tight and near 100%.

Take just the first two days of this week as an example. Below is a 5-minute candlestick chart of the DXY that begins at 5:00 a.m. on Monday and runs through 10:00 a.m. on Tuesday.

Next, here's a chart of the front month, Dec23 COMEX gold over the same 29-hour time period:

In the little, itty-bitty COMEX silver market, the impact of the HFT-only trade is exacerbated during periods of light volume. Again, take a look at the chart below and compare it to the chart of the DXY. Note the clear inverse correlation.

So, we're going to have to watch the DXY pretty closely over the next two and a half weeks. Once we get to Jackson Hole and the next U.S. jobs report the week after, human traders will return and fundamentals might begin to matter again. Until then, we're going to need DXY to turn lower if we're going to have any chance at a rally in the COMEX metals.

On the chart below, you can plainly see the resistance levels to watch for the DXY. The downtrend line stretches all the way back to November 2022 and is very well defined near the 103 level. Any sustained break above this line would lead to a short-covering rally in the index and more pain for the precious metals. However, should the line contain this current rally as it has in the past, an easing of the index and a drop back toward 101-102 will provide some relief to the futures selling in the days ahead.

So keep an eye on the DXY as the Dog Days continue. For your sanity, maybe you should follow the lead of all those European and U.S. traders and take your own vacation over the next few weeks and just get this period behind you?

Either way, the trick will be to manage your emotions and clear your head over the next few weeks. Once summer ends, it will be all hands on deck as we move towards what will be a very exciting and volatile final third of the year.