Thursday, December 17, 2009

Dollar Rally Smacks Precious Metals and Stocks

The dollar rallied hard yesterday through today putting great pressure on commodities and stocks. Gold and silver lost over 3% and equities tumbled on the stronger dollar; again showing the real fuel behind the stock market's rally and strength. When the dollar rallies, stocks buckle. As you can see from my previous post last night, the dollar has formed a major bottom and should rally for months. The stock market will have a very difficult time making new highs under these conditions. Let's look take a look at the charts I have this afternoon:

1) the daily S&P cash chart shows that yesterday the market again was repelled by the top-end of the range it's been trading in the past few weeks, suggesting that the bulls still don't have enough force to push it through to the upside to new highs. So now we must focus on the lower end of the range around 1085 and see if the bears can come in and take control. A close beneath 1085 would be a good sign that perhaps the range trading has broken to the downside.

2) the primary impulsive S&P count shown is my top choice for 3 reasons: 1. the dollar appears to have bottomed and precious metals have topped so a major stock market top may be at our feet right now; 2. the decline looks very impulsive and one of the strongest and most clear we've had in a while, and the wave (2) correction is quite shallow suggesting there is a lot of downside pressure to this decline instead of just the usual ABC decline; and 3. the fact that other indices are looking very toppish and have made solid closes to suggest their downtrends have resumed (i.e. Russell 2000 and XLF). Also, this is a great risk/reward opportunity for the bears. The count is wrong with a break above 1101, just 5 points higher from current levels, and the profit potential is huge.

3) the alternate S&P count chart shows the other possibility in that we are in an A-B-C corrective decline that will most likely be halted within the range above 1085 and then rally again towards 1120 and possibly higher.

4) gold and silver have sold off sharply, fitting well into the "blowoff top" scenario commodities usually undergo when making a major top, just like oil did into its $147 top before it reversed to around $30. Gold and silver should make similar moves to the downside now. The attached gold futures daily chart shows a triangle in the middle of the rally over the past several months. Triangles only occur in B, X and 4th waves. This is obviously not a 4th wave, and the entire rally looks a lot like a clear 3 wave rise, so it's probably a B wave. A break of the wave A high at 1010 will confrim that the rally was a 3 wave correction, and that 680 will be broken on the downside before a new high above 1220 is achieved.

5) the gold futures 10min chart is self-explanatory. I just wanted to show that it appears the next round of selling is underway as it appears to be declining impulsively since making a modest rally attempt this week. Look for gold to continue lower, capping any rally beneath the 1140 level.

6) the XLF is a very telling chart. This is the most bearish market I can see right now next to precious metals. While other markets were churning sideways or making slight new highs, the XLF was actually grinding lower. Following a clear 5 wave decline back in October, the financial sector has made a modest rally and then chopped lower, capping all rallies beneath a descending trendline. Today's close was on the lows, and is the lowest close since the wave 5 bottom back in October. This sector should continue downward with rallies capped beneath that blue descending trendline marked in the chart.

7) the Russell 2000 daily chart tells a similar story to the XLF. After its 5 wave decline in October it has failed to make a new high, and actually has SO FAR rallied in 3 waves. Breaking beneath the wave "a" high is a good start in confirming that the rally was in fact 3 waves - a correction, but a print beneath the wave "b" low will ultimately confirm it.

So there you have it, a lot of bearish action occured today leaving the possibility for a major market top and reversal to be underway right now. However we still have a long way to go before confirming it as we've seen this type of action fool us many times before. But the table is set for the market bears to take over if they're ready.

The key things to watch for in the coming days are:

1) as long as the dollar uptrend remains intact, the stock market will be biased to the downside.
2) gold, silver and all commodities have been a big part of the stock market's rally, so continued bearish action in this sector will also be very bearish for stocks.
3) watch for the XLF to make a new low beneath it's October low.
4) watch for the Russell 2000 to break its wave "b" low.

Any of these things occuring will strengthen the short term bearish case for the stock market. As always, I welcome all your questions and comments on recent action in the markets.


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