Another Take on the Markets

In summary, he's looking for a market top with 3-5% more upside before a roll over and then a 40% correction.  He agrees that the dollar rules everything else, and that the dollar is due for a short but sharp upward correction.

Longer term, the dollar will go down.



We don't agree entirely, but we have to respect others' opinions and consider the possibilities.

The dollar appears to be weakening.  After our call on the pennant, the dollar broke down and is currently testing that 76 level that we discussed earlier this week.  We're at that stage where we are going to determine whether or not the dollar is going to make a fast move toward 72, or if it will have a stronger rebound.  It's not clear yet, but we tend to believe that the dollar will not strongly rebound until it hits the 72 region, which would probably spell much more upside for gold, oil, commodities, and stocks than the trader in the video sees.

We will know soon enough.  Watch that support around 76 for clues.

Meanwhile, let's look at the S&P to see what kind of patterns we might find.

The main bullish pattern that we've discussed over and over again is the inverse head and shoulders that is currently active, with a longer term target of 1350 (not shown on the chart below to try and preserve clarity, but you can find it mentioned many times in Technical Archives as far back as July.)  Given that there's so much skepticism about this move up, we tend to believe that the 1350 level is achievable.  That would present a whole new BEARISH case that we won't really get into now, but suffice to say that if the market goes that high and rolls over, we may see a crash the likes of which has never been seen.

Here's the long term picture.

The longer term picture has no obvious concerns aside from fundamentals, which we can probably all agree are generally lousy.  Note that stocks are generally traveling in an upward channel, and that momentum is running out.  The question is going to be the degree of pullback--will this be a crash or more of a consolidation? The first thing to note about separate a real crash from a pullback would be the lower trend line that's around 1000 at this stage.  A break on the weekly chart below that and we have a potential big problem.  It would not be surprising to see a gentle downtrend toward 1000, and then a higher move as we near the lower trendline.  Note that the RSI still has "room" for an upward move.  If any major selling occurs, it will likely be when the RSI breaks over 70 or breaks down on the red upward trendline.

Let's look at the shorter term charts for some possible downward patterns.

The first pattern that we believe is more significant is this rising, broadening wedge.

There is still some short term upward momentum.  The red lines indicate support and resistance.  It is possible we'll see a rise toward 1100 on the S&P and a complete breakdown, taking us to 980.  We discussed last week that buying at the bottom of the channel would be a positive.  At this stage, we would not be moving into equities, but would generally be watching to see how this develops--holding what we have until the 1100 range or some resistance line forces a sale.  A break below that 1035 level could spell trouble as it is both a support level and the lower channel support level.  We do not have to go entirely to the top of the blue trend channel at this stage for the wedge to start breaking down.  We tend to favor more upside in the short term than downside, however.

The most concerning aspect to this pattern is that we continue to run along the upper trendline and cannot break through.  A breakthrough to the upside, of course, would be very bullish.

Another pattern that has been reported out there has been the rising wedge.

 We reported on this one last week.  Our concern was that this is not a well defined wedge.  You typically want to see the pattern move completely from one trendline to the other.  Rising bearish wedges (as compared to the rising broadening wedge in the first chart) is less dependable.  In fact, the Bombay Stock Exchange recently broke a rising bearish wedge to the upside.  Technically, this broke down, but as you can see, the market has trended higher since.  We prefer the first chart as a more dependable, better formed pattern, though the downside count on both charts moves to 880.

Of course, all of this depends on the dollar activity.  You can see the correlation between the S&P and the dollar continues on:

Until we see this dollar/asset market correlation start to break down, we can only assume that stocks will respond opposite the dollar.  One source of breakdown would be a return to the credit crisis.  As we detailed before, we should have advance warning of this condition.  The other possibility, which we tend to believe in, is that there will be an event that will decouple the general S&P from the dollar, commodities, and gold.  As of this stage, we believe that may be the announcement of holiday consumer sales that will top the markets, somewhere in Q1/2010.  Until then, we will continue to track dollar/equity correlation, and as long as the correlation remains strong, we can expect a lower dollar to equate to higher general equity prices, and vice versa.

The most likely catalyst for a strong equity market sell off in the shorter term is a rise in the dollar.  Thus far, we have not seen the bottoming pattern appear in the dollar that would be required to force asset liquidation.  That time will probably come, but it's not here yet.  Instead, our view remains that any major sell off in equities becomes a buying opportunity for stocks of commodity producers in the energy, food, and precious metals arenas.

We'll be back with technical updates on gold, the dollar, and commodities in a bit.