August 19 Market Action - Correlation and Breakouts

It was our intent today to launch the next part of our "Where?" series, but a few computers doing some number crunching decided to create more problems than necessary. Needless to say, that ended up taking priority. Ideally we'll be caught up tomorrow.

In the meantime, here's another bit of analysis on the state of the markets.

First, some correlation views of stocks, commodities, oil, and gold with the USDX. For clarity, lines of support are solid. Lines of resistance are dotted. Blue lines correspond to the USDX behavior. Red lines correspond to whatever asset we're measuring against the USDX.


The correlation remains strong. You can see there's room for the market to move down and the dollar to move up before there should be any concerns.

With the candlestick chart, you can see more clearly that the dollar could rise up to the 80 level and not violate the descending right triangle.


Note that the slow stochastic is working toward oversold. In the shorter term, the dollar is in a pennant formation, and will probably break up or down in the next day or so. It could go either way, though odds favor a continuation of the downtrend.

You can clearly see the support levels. The 50 day moving average is serving as strong resistance.

The commodity complex has been particularly strongly correlated to the dollar until recently, when it has really rallied strongly. Either the commodity complex is ahead of itself (which is dependent on both the dollar and growth in consumption in Asia) or the dollar is behind. We remain generally bullish on commodities in general and believe the strong pullback in the Shanghai Composite Index to be a continuation of the bull run. We believe that eventually, the Chinese markets will become a bubble, but that may yet be a few years out.


Oil appears to have more of a mind of its own. The price correlation is certainly there (being the global reserve currency, commodities, including oil, are traded in US dollars). However, you can see the demand move up at roughly the same point as the rest of the commodity complex pictured above. We know China is stockpiling. The real question is whether or not they can fuel domestic consumption. Outside of the developed world, oil demand is increasing. At this stage, we doubt we'll see oil fall below $60/barrel again--ever.


The correlation in gold is a little different. It does NOT always move opposite the dollar. This is what many people do not realize--gold IS money. It is the money of last resort. In times of panic, gold rises. In times of dollar weakness, gold rises. In our opinion, gold is easily the safest asset out there. Plus, we think it's getting ready to make a big move. A very big move.


Assuming the dollar remains weak, we expect asset prices to rise--primarily on the back of a weakened dollar, not on fundamentals. The assets with good fundamentals will do even better than the nominal rise in asset prices due to the weak dollar alone.

We believe gold will lead that next leg upward. You can see that gold doesn't have much down room compared to the dollar's up room required to stay within the trend.

As sign that it's about ready to move will be if the dollar remains in sideways trading and gold starts to move up--on both up dollar days and down dollar days. That's a sign that it's about to break loose.

Much like the dollar, gold is going to have to make a decision on which way to move very soon.

We are looking for a few more signals to point to a bottom.

That's it for the night. We'll try to get back on track tomorrow.