September 30 Market Update

It has been an interesting week thus far, and it looks like the ride is about to get wild.  Tomorrow we're going to focus heavily on gold and gold equities.  Don't miss it.  Friday, we're going to throw global currencies into the mix to show what a real bull market looks like globally...

Tonight's Technical Summary
The dollar appears to be topping, which will soon positively effect all asset prices, notably gold.  Commodities in general are preparing to break out, with gold taking the lead.

US Dollar
In short, we may be topping again for the bounce around 76.  Like at 78, we need a decisive break below 76 to confirm it, but it appears that we're near that point.  The 76 support level is not as strong as the 78 support level, and the dollar should not hang around this level as long. 

The possibility of running up to the 50 day moving average around 77.91 is still there, but it seems less and less likely that this will occur.  We will soon test the 76 level again.  When this occurred at 78, the dollar rebounded for a few weeks (see the chart above), and then failed after it pulled itself up.  It is possible that we'll see this behavior again, but we do not believe it is as likely.  The reason why, of course, is that gold has started moving again, as it sometimes does before big moves.  Keep in mind that there is little dollar support between 76 and 72, which will send asset prices on a wild rocket ride when the break down occurs.

Precious Metals
We had hoped to see something as low as 960 on a reaction pullback from gold.  Though not out of the question, it appears less likely now that this will occur as gold continues to find buyers at the 990 level.  There is virtually no resistance at 1000 any longer.  The key area of resistance is now the band between 1020-1024.  We may have another reaction low or two to the 990 region over the next few days, but it appears that gold is about to make a move to take out 1024.  That will probably make 1000 the new floor for the yellow metal.  Let's see how it develops.

Silver also looks bullish.

It is possible that we may see a bit more weakness in the metals, but the downside is VERY limited.  If you're looking that entry point, it's probably here.

Since we know that both gold and silver are in bull markets (we do KNOW this, don't we?), it is sometimes useful to look at the gold:silver ratio for indications of what's occurring and what's to come.  As an economic indicator, when the gold:silver ratio rises, that implies that economic risk is rising in many cases.  Coupled with indicators like the TED spread, as discussed in Friday's article on the credit crisis,  a rising gold:silver ratio should be a warning sign of financial crisis.

Similarly, a lower gold:silver ratio is indicative of better economic activity because silver is used as an industrial metal.

Currently, we can see that the gold:silver ratio is generally trending downward in a channel.  This is a sign that the financial markets are not at as much risk as they were.  As long as there's no additional financial market risk, we can use the movements in the channel to determine which is the better trading vehicle, gold or silver.  As you can see, the gold:silver ratio is beginning to trend higher, which implies that gold will outperform silver for a while...

Commodities
Though we've shown it several times before, we've never described what's contained in the Continuous Commodity Index, or CCI.  The CCI tracks 17 commodity futures including:

Crude Oil : 5.88 %
Heating Oil: 5.88 %
Natural Gas: 5.88 %
Total Energies: 17.64 %

Corn: 5.88 %
Soybeans: 5.88 %
Wheat: 5.88 %
Total Grains: 17.64 %

Lean Hogs: 5.88 %
Live Cattle: 5.88 %
Total Livestock: 11.76 %

Coffee: 5.88 %
Cocoa: 5.88 %
Cotton: 5.88 %
Orange Juice: 5.88 %
Sugar: 5.88 %
Total Softs: 29.40 %

Copper: 5.88 %
Gold: 5.88
Platinum: 5.88
Silver: 5.88
Total Metals: 23.52 %

The CCI is a snapshot of the strength of the commodities markets, and we prefer it to the CRB.  As we reported last Friday, the CCI is poised to break out of an ascending triangle pattern.  We appear to be very close to this breakout, implying a commodities run ahead.  Just to save some time, we can report that the precious metals look poised to break out, portions of the energy sector are poised to break out, and the agricultural commodities are indecisive--they will be the determining factors.

Last week we discussed buying crude oil around 67.50, with a possible low end of 62.50.  That turned out to be a very good call with crude bottoming at 65.05.  Given the seasonality of crude oil, we may see continued sideways trading for a while here between 67.50 and 75 before a major breakout.

Natural gas continues on a tear as if its making up for lost time.  Several weeks ago we discussed a potential false breakdown.  Shortly after that, we caved and figured that natural gas was destined for a $2.00 cash price--that was the bottom.  That's how markets work sometimes...

Short term, natgas is due for a consolidation.  However, that is likely to be short lived before it continues its run up.  You can see from this three year chart of the crude oil to natural gas ratio that when the ration gets high (above 14), that means that the price of crude oil is high relative to natural gas.  One would see crude oil and buy natural gas at that point.  When the ratio falls to around 7, the opposite is true...

Given the crude oil chart pattern versus the natural gas chart pattern, we believe crude will likely stay range bound while natural gas plays "catch up," after a consolidation period.

Dr. Copper bears close watching.  It is trending along the bottom edge of the bullish channel it has held since March.  If it breaks below that lower line, it should be a warning of at least a major global consolidation coming that would affect most everything except gold.

Equities
The global equity picture is a bit more mixed.  We seem to need more consolidation time, though if the dollar breaks down, equities can turn up on a dime.  We can leave it at that for now with further analysis tomorrow.

Stress Indicators
For the most part, things look good.  We have some concerns about the flattening of the long end of the Treasury yield curve, but then again, quantitative easing by the Fed can distort that picture. All appears to be clear.