April 18, 2010: The Week in Preview

Last week's big news involved Goldman Sachs' fraud allegations and how that began a downslide in the markets.  The bears are already out in droves calling tops and declaring the end to the stock market run.  It is precisely this attitude that makes us believe that this market will continue to run farther--the bears have not yet thrown in the towel.  One day, it will turn over.  But we're not so sure Friday was that day.

As reported last week, the markets were already overbought and due for a correction.  The real question is "how much of a correction?"  Here's what we're watching.

As we've said many times before, the burden of proof must lie with the bears.  For over a year now, every market correction has been met with top calling by the bears, but they have no ability to turn it over.  Until then, you must assume this is a bull market--until the trend changes.  For now, keep an eye on the 1105 - 1145 range.  We're inclined to believe that this particular move will end at the 1145 range, but it may move as low as 1105.  If it were to move lower than that for more than a day, then the bears may be gaining the upper hand.  Until then, we'll leave the top calling to the bears and ask for some follow through...  It's a shortable move if you're trading, and perhaps some hedging of long positions may be in order.  If you'd like to know exactly why we believe this is what the S&P 500 will do, send us an email.  We're trying to better determine who's reading.

We're more predisposed to believing that the next down leg in the stock market will be due to rising interest rates, but it's still a bit premature to call for a bear market in Treasuries.  Though the long bonds are perched precariously on an inverse head on shoulders for its yields (see chart below), we know the Fed can also read charts and will defend the bull market in Treasuries as long as it can through whatever mechanisms it can.  A substantial rise in yields is exactly what the US cannot afford.

The gold and currency markets are behaving largely as expected.  Though we expect range trading between EUR/USD pair for a few months, it appears they may have bottomed/peaked, respectively, per the key Fibonacci retracements on the charts below.

Note that the dollar has fallen below its simple trendline from the rally in December, and though it will likely stay near its current levels this week, we believe this move to the upside may be over.  Behavior this week will be important as the dollar is short term oversold, and if its bull rally is over, it should not set a new high during this short term move as the stochastic works its way to overbought.

The reverse is true for the euro.

The euro may have set a double bottom.  It is overbought short term still, but should not make a new low as the stochastic works its way to being oversold if it has bottomed.

That leaves us with gold.

Gold has already hit its first area of support, but it is still dramatically overbought.  Typically, the bullion banks take this opportunity to try and break gold down below this first level of support when these conditions occur.  For a longer term move, this is a reasonable buying area, but be prepared to average down to as low as 1100 level.  We believe that level will now hold and gold will quickly return to break through the 1165-1170 level, then move to challenge 1225.  At this stage, it's not clear whether or not gold will break through that level at this time, or if it will succumb to its seasonal tendencies and not move up strongly until September.  A failed challenge of 1225 would not surprise us, and though every deflationist would come out of the woodwork at that point, it would not negatively affect gold's longer term bull market.

That's it for tonight...