November 7: Week in Preview....

We'll be launching the newsletter later this next week. The first edition will be be more abbreviated than will future editions as it will only be a couple of weeks before the next edition is released.

To summarize, it appears that the US dollar will be rallying starting this week--either that or a crash is brewing. While the latter is possible, we're not convinced we're there yet. We anticipate a short term pullback in asset prices associated with a dollar rally, a continued run up in asset prices shortly thereafter, then an intermediate term rally near the end of this year or early 2011.

First, a look at the USDX.

From the monthly chart we can see that the trend was and is clearly down from the 2000 - 2002 triple top, with the 80 level serving as the critical pivot point.  The 2008/2009 and 2010 tops near the 88/89 level appear to support a double top, implying that the lows at 70.70 will be tested at some point in the next year.  However, there is an upward trend from the 70.70 level lows of 2008.  The larger configuration is a symmetrical triangle.  Currently the dollar is right at the lows with any further significant breakdown signifying a run toward 52 on the USDX as the minimum objective of the dollar.  There is plenty of room on the RSI and slow stochastic to allow further downward room longer term.

The weekly chart shows a closer look at the upward dollar trend.  The upline has been violated, though the weekly close is above the line.  We take this as a sign of a possible intermediate term rally (though we don't favor those odds) beginning soon, but the uptrend is not strong enough to support a major bottom.  IF we assume that a rally is already in the cards and has started as of Friday, November 5, it's unlikely that the rally would exceed the 80/81 level.  The RSI and slow stochastic are oversold.  We will look to the daily charts to determine when a countertrend rally may begin.

The dollar has completed a bear flag.  A significant move down from here that stays below the 76 level for a day or two implies a large downside move is coming.  If a rally is going to start and be sustained, it will have to start soon.  Our short term dominant cycle model provides some incite.  We use the UUP dollar ETF to provide short term timing using a modified version of a Hilbert transform and a fractal formation.  These models show a possible short term low took place on November 4.

Note the cycle model shows that we should see a turn when the black line at the bottom of the graph crosses the red line.  That appears to be within a few days if the dollar rallies, so we anticipate the dollar rally will be short term, not intermediate term.

The red volume bars in the lower portion of the chart signify points where a turn is likely to have occurred.  The last occurred on November 4.  Based on the additional evidence, we believe that a short term turn has begun.

Do asset values concur?  The evidence there is not clear yet, though it is not uncommon for a turn to occur in one financial security before a highly correlated security makes a turn.

On the weekly charts, you can see gold's inverse head and shoulders breakout.  The intermediate term target of roughly 1400 has been reached.  It would take several days of sustained rally above 1400 to play the momentum to the upside.  At this stage, short to intermediate term pullback appears to be in the cards.  We suspect that the pullback will be short term with an intermediate term pullback coming in spring of 2011.

 

Note that gold is overbought on the RSI for the daily, weekly, and monthly charts.  As we reported last year, whenever  gold has shown up as overbought in all three timeframes, whenever the pullback does occur, it is typically very strong.  We don't expect this strong pullback to come immediately, though we would not be chasing gold here except as a trade.  If the dollar were to continue to fall and gold sustained a run above 1400, it may imply that the dollar move down is becoming disorderly--fundamentals are taking over and hyperinflationary risk is high.

Using GLD as a proxy for the timing model, we see similar timing as we see in the dollar for a turn--implying a short term pullback for gold, not an intermediate term move.

Short term, the S&P is largely overbought.

 

Much like gold, we anticipate a short term pullback followed by a continued by a continued liquidity-driven run up in asset prices.  The S&P has a target of at least 1250 as it executes an inverse head and shoulders pattern.

It is likely that by Wednesday the 10th, we'll either be in a consolidation/pullback mode.  More updates mid-week and more detailed information will be in the newsletter.