We want to correct something in yesterday’s Trade Alert in which we initiated a long position in the dollar ETF as a Pot 1 trade.

It is certainly true, as we noted there, that the dollar is extremely oversold, almost historically so. And that oversold state bolstered our confidence in our position. But the degree to which an asset is oversold or overbought will never in and of itself directly impel us to act.

Our indicator signal was the impetus behind the trade. We want to make that clear.

Notoriously Difficult To Time

One reason is that even though it’s true that when something goes to an extreme it usually will correct, timing such a correction is notoriously difficult. And the fact that an asset goes to an extreme in the first place sometimes indicates it has underlying strength.

Also, over the course of several months it’s not unusual to see an asset go from oversold to overbought and back to oversold. In other words, even if your time frame is relatively short – and ours is about one month – it’s hard to quantify with any precision the degree to which an asset is oversold or overbought.

So while it was correct to say the dollar is oversold, it was misleading to suggest that lay behind our trade.

Not to make things overly complicated, I’ll point out that some of the variables that do go into our equations may correlate with overbought/oversold readings. But to the extent they do, they would indicate whether that overbought or oversold condition is sustainable. By itself, an oversold/overbought reading has very limited meaning or value in trying to predict the course of an ETF.

Our Pot 2 Cypress Trade

Turning to our Pot 2 trade, Cypress Semiconductor (NASDAQ: CY), it is largely informed by our belief that Cypress is re-emerging as a dynamic growth company. Buttressing the case for Cypress were the recent revelations of an underlying flaw in all computer CPUs (central processing units). Since CPUs play an integral role in any broad-based computer system, it’s clear that patches for the flaw inevitably will slow down any such system.

That will likely raise the need for smaller embedded circuits like connectors. And Cypress is one of the leading manufacturers of such circuits.

Again, a reminder that in the case of Cypress, we will calculate returns on the assumption that you bought on margin, which requires roughly 50% of the initial cost.

Bitcoin, Gold, and Psychology

A few words on Bitcoin. While we don’t have an indicator for Bitcoin, we noted a few weeks ago that we expected Bitcoin had likely made a top and that the real test would come in the $8,000 area. We approached that area today. So far, Bitcoin has held.

We expect it will be tested further and that if Bitcoin found a home below, say, $8,500, it would indicate the long-term uptrend no longer is in effect. This would not mean the cryptocurrency would plunge to $5 or $10 or even foreclose a new uptrend. It would simply suggest that the whole idea of buying on weakness and selling on strength, which for traders characterizes what an uptrend is all about, no longer would apply to Bitcoin and likely not to other cryptocurrencies, either.

Because Bitcoin is not readily related to other economic metrics, it has to be judged almost purely on psychological grounds. That’s why we look at charts very carefully in analyzing this asset.

Interestingly, and we’ll have more to say about this in the future, gold, too, used to be determined largely by psychology. That’s no longer true. Today trends in gold are determined more by gold’s relationship with other currencies, in particular the Chinese yuan, but also the dollar, along with other factors. In other words, it has graduated to becoming an asset integral to the world’s financial system.