September 23 Market Update

We have a mix of charts from yesterday and today as they've been available. Some charts needed updating based on today's events, notably the dollar, and others remained about the same.

Summary
We expect, as we've noted before, a bounce of the dollar at 76 in the short term, which will cause some selling in assets including stocks, gold, and oil. The bounce could last a couple of weeks to a couple of months, though we doubt it will last as long as the bounce around 78. This will create good buying opportunities in stocks of commodity producers for the intermediate term. Long term--and it's not clear exactly when that starts, though we're thinking within the next 6 months to one year--we expect things to get ugly again. The next round will look more like the 1970s stagflationary episode.

On to the specifics.

US Dollar
The dollar made a surprise reversal today. After spiking down below the 76 level intraday, it reversed and had solid gains for the day. This, in turn, forced a sell off in other assets. Stocks went from a positive day to a strongly negative day and gold had a minor sell off. Hopefully, this is the consolidation we've been waiting for in order to find a reasonable entry point. Time will tell.


The dollar is oversold and at support at 76. We anticipate that it may rise up as high as the 50 day moving average*intraday* at around 78.14 on this move. If it moved above that level, it would be considered a warning. You can see the support and resistance levels in red in the chart above.


The trend is easier to see on the intermediate term and longer term views. As long as the blue downtrend in the chart above is preserved and the credit markets remain liquid, markets will continue to rise. You can see that 78.14 would break that blue trendline, which would be a warning flag. A rise in the RSI above 50 would also be a warning. Odds are, we will see the dollar rise to the center of the Bollinger Band around 77.29 before resuming a downtrend.

The above long term dollar chart (weekly) puts things in perspective a bit better. The dollar's rise from 72 was due to the credit crisis. The red rectangle in 2008 shows its consolidation pattern as it broke out. Since then, it has formed a double top, which implies that it will, at minimum, wipe out the gains it made from 72 - 89.

Precious Metals
We are using yesterday's charts for these, but today's minor down day does not affect the analysis.


On the short term chart, we can see the breakout from the triangle (in blue) and the horizontal resistance and support lines (in red), with 1024 being resistance (note that this is the number that Jim Sinclair continues to refer to). Gold is also overbought by several measures. Combined with a possible bounce in the dollar, we may finally see a gold correction to allow some to enter the trade. Any correction will be short lived. For the long term investor (and in this environment, gold is not a thing to be traded lightly...), anything below 1000 is a deal (spot price). There's an off chance we may see something lower like 970, but don't hold your breath waiting for it. You can see why below.

Above is the long term (weekly) chart. With the penetration past 1000, the run toward 1300 is all but guaranteed. A minor correction lasting a few weeks would be a great entry point for those that missed the earlier breakout.

Similarly, silver looks ripe for a correction, and thus an entry point for those that missed the move.

We believe silver will outperform over gold in time, but the risk with silver is higher. As a general rule, silver does not have the monetary respect that gold has. In a credit crisis, silver will "get killed" while gold holds its own. Note that it continues in its solid upward channel with overbought readings on the daily chart. Look for a low in the 14.50 range as the RSI starts to turn up again from just above 30 as a buying opportunity.

Equities
Globally, stocks are showing some mixed signals. We're generally bullish on equity markets, but have a particular interest in emerging markets with growing middle class consumer bases.

In the US, the S&P looks to be headed back toward 1350 from a technical, long term perspective. There's a chance it will face serious opposition at 1250. Fundamentally, the S&P is in deep trouble. However, the charts are what the charts are. We're going to go along for the ride, even if we don't believe there's a fundamental basis for what we're seeing. You can see that the RSI is not yet overbought, though the stochastic is. Expect a correction over the next few weeks to correspond to the dollar's bounce. The length of the correction is proportional to the dollar's strength and no more. This market continues to want to move up. Don't fight the tape.

A similar view is evident on the daily chart. We could see a correction back to 1040 without much angst.

Why 1040? Here's the potentially bearish view of the S&P:

That is a rising wedge--a bearish formation. A drop below 1040 (the lower border in blue) may be the catalyst to take the S&P back to 880. That's something to keep any eye on as we move forward.

Emerging markets, as a general rule, appear to be bullish. Frequently these markets will follow the US in a sell off, so we're cautious about entering them right now.

India broke out of a rising wedge with a bullish breakout, so there's no guarantee that the US rising wedge will end up being a bearish turn.


We will spare you the review through all of the emerging markets. In general, they're all bullish. The one exception, oddly enough, is China's Shanghai Exchange:

Most of the emerging markets, including China, bottomed in November of 2008--before the US markets bottomed in March of 2009. There's a chance that they may forecast another downturn in advance of US market down moves. We can see that on the long term chart, China was overbought and began consolidating. However, it did not turn up and act bullishly recently as one would anticipate. There's no clear path to determine what Chinese equities are going to do next, so we turn to Fibonacci numbers to help out.

We can see that the rally from the November 2008 lows retraced an almost perfect 38.2% level from the October 2007 highs into August of 2009 before turning back to consolidate. Instead of crashing again, the market appears to be consolidating--interestingly enough, around the 50% retracement level between the August 2009 high and the September low. We have fractal behavior in this market.


We would be very concerned about a break below 2639.75. More likely, this consolidation is almost over, probably ending in sympathy with any US market consolidation.

Of particular interest also are the gold stocks in this environment.

The HUI gold bugs index continues upward in its rising channel. There's a chance that with a dollar bounce and corresponding gold market/stock market pullback, that we'd see the HUI reach its 50 day moving average near the bottom of the channel before an uptrend resumes. Now's the time to be picking out those gold stocks and getting ready...

Commodities
Commodities, as measured by the Continuous Commodity Index (CCI), are in an ascending triangle pattern. We expect that we may see the bottom of the triangle "touched" during a consolidation. If prices then turn up from that ascending line, commodities in general would be a buy. This is a very bullish formation once the price breaks out above the horizontal upper boundary.

Dr. Copper continues to tell us all is well in the world. Like silver, it is in a rising channel and has been for a long time.

Crude oil itself is a bit of a conundrum. Today's price action had a very negative effect on the charts. Look for potential buys at 67.50. If that level fails, 62.50 will probably hold. This is one to watch and see what develops in time.


Natural gas, on the other hand, led by a short covering rally, may have some upside potential. We noted a few weeks ago that there was a chance that the breakdown out of the rectangle may be a false breakdown. Just as we were giving up hope that it could turn back up, it did. That huge gap up is a clear sign of forced short covering. This one may have a minor pullback, but it is poised to go much higher now.

Crisis Indicators
All's quiet on the Western Front as it applies to credit stress indicators.


Conclusions
Assets are poised to go much higher after a brief rally in the dollar. Unfortunately for dollar holders, assets are going up because the dollar is going down with no significant relief in sight.