August 25 - Technical Market Update

Some interesting events today. Notably, crude oil hit its 200 week moving average and rolled over even as the dollar faltered. We are seeing signs of increasing divergence and a possibility of a strong pullback occurring soon.

Market Scenario
As we've shown in our technical updates thus far, a falling dollar implies that assets like stocks and commodities will move up. The opposite is also true. If the dollar were to start rising, assets will fall accordingly.

Right now, there are no indications of an impending return of the "credit crisis" which would lead to panic selling. However, from a cyclical basis, we are within a period of time where we must be vigilant in watching for such a return based on our market model. We will, of course, immediately send an announcement if we see indications of an impending return of a liquidity problem. If you'd like to get an automatic notice if this occurs, please send an email to us at dredd.evry@gmail.com with a contact email address.

Note that it is possible for the stock market, based on fundamentals, to start to decline without the dollar rising if the rate of the dollar decline exceeds the rate of decline of the stock market itself (this would be similar to the October 2007 - July 2008 period). In summary, if the dollar rises, assets will fall. The dollar will only rise on a technical bounce (like we're seeing now), if the credit crisis returns, or if the economy is structurally fixed. We do not see anything other than a technical bounce at this time with a duration of maybe another couple of months. We have several proprietary indicators that should alert us to any impending credit market issues.

US Dollar

We're still in an overall bearish territory with a longer term target of 72 (we'll most likely have another rally/bounce again at 76). However, we are seriously oversold and the dollar will, at minimum, need to tread water for a while, which is exactly what it has been doing for a few weeks. The question remains: how far can the dollar rise? Of course, this is a difficult question to answer, but we can look at the short term charts and get a sense of the likely areas where it may move.

Note that we're trapped in a tight range where the dollar is "bouncing" around between the 79.51 level on the upper end and the 77.42 level on the lower end. Essentially, we're pivoting around our old friend 78.33. Note that we may be setting up a rectangular consolidation pattern from which the dollar will have to break up or down. The longer the consolidation lasts in this range, the more likely it is to break down and move toward the 76 level.

Crude Oil
The long term oil charts are bullish, but overbought. Today's divergence between crude oil and the dollar occurred when crude ran up against its 200 week moving average. Short and mid term, we expect a pull back to the 65 range (maybe only 67) while the dollar treads water and then a run back up to challenge the 75 level. Assuming we breach the 75 level, we will likely move toward the 95 price point over the next six months.

Again, and we cannot stress this enough, a sudden and sharp move up in the dollar may disrupt this pattern. As the situation evolves, all factors in various markets must be taken together in context.



Equities (Stocks)
Stocks have been acting a bit bearish. They appear overbought and tend to sell off near the end of the day. It's likely we're finally ready for that pullback. Similar to oil, stocks are overbought short and mid term, but longer term have the opportunity to run up significantly--well beyond what fundamentals would imply. We would not add to positions here, but will likely hold what we have and wait to see the behavior of the stock market on any pullback before committing new funds.


On a separate but related note, we think Chinese stocks are a cautious buy here.

Summary
We are in a period where our model indicates that we could see the beginning of another stock market move down. If this window of opportunity closes and the markets are in good shape, we will be very bullish on stocks for another move up. But for the next few weeks, the risk of a significant pull back or beginning of another crash is elevated. We advise caution over the short and mid term. Traders should look to take profits here. Commodities, aside from gold, may exhibit the same behavior.

Though we didn't cover it specifically tonight, we have repeatedly stated that gold looks as if it may be preparing to launch forward.

The credit crisis does not appear to be making a return in the immediate future. The implication is that assets with good fundamentals, notably commodities and stocks of commodity producers, will likely do well after any consolidation period initiated by the general stock market sell off.