In reaction to U.S. Federal Reserve Chair Janet Yellen’s speech at The Executives’ Club of Chicago, the market pushed the 30-day Fed Future Funds to price in a 79.5% chance of a rate hike in March. These odds are up from 77.5% the previous day. Given the odds were already so high, the more important headline is that the odds did not decrease; Yellen did nothing to dissuade the market from its preparation for a March rate hike. Still, there was a bit of a sell on the news reaction in currency markets that sent the U.S. dollar index (DXY0) down sharply on the day. The reversal was sharp enough to plunge the dollar back to its support at its 50-day moving average (DMA) and thus start an early challenge to my assertion that the dollar will rally into the Fed’s March meeting.

The U.S. dollar index plunged right back to support at its 50DMA

As I saw the “sell the news” reaction unfold, I quickly made an adjustment to my gold vs bonds pairs trade. I sold my put options on iShares 20+ Year Treasury Bond (TLT) and applied the profits to loading up on more SPDR Gold Shares (GLD) call options. I stand prepared to short TLT again IF it hits the top of its current range or breaks to a new low. The current technicals favor another run at 200DMA resistance for GLD as buyers stepped in at support from February’s mid-month congestion. Moreover, the 50DMA is rushing upward along with an uptrending 20DMA.

The SPDR Gold Shares  rallied intraday to close the day near flatline. Momentum may be swinging back to the buyers.

The iShares 20+ Year Treasury Bond (TLT) found firm support at the bottom of its current trading range. Yet, TLT remains below its 50DMA.

I may also need to rethink my new assumption that volatility will trend upward into the Fed’s March meeting. The volatility index, the VIX, took a major beating as Yellen’s words seemingly soothed whatever frayed nerves are still out there. The VIX dropped back to 11 and reaffirmed that the market remains in a period of extremely low volatility. As I demonstrated earlier, this extreme is NOT bearish, it is, surprisingly enough, bullish for the time-being. The S&P 500 is back to marching confidently toward the Federal Reserve’s next rate hike.