Tuesday, December 15, 2009
Dollar Surges Higher; Stocks Remain Flat, Directionless
Yes, I did make up the word "directionless" from the title above. So what :) That's not important, what's important is the US dollar's continued surge higher. The rally appears a bit overbought and momentum waning but the dollar was so oversold and over-shorted on a long term basis that the current rally may be relentless, offering little opportunity to enter. I'm still cautious of a snap back decline in the dollar, but with such a significant change in trend to the upside, surprises will also be to the upside. The dollar strength will continue to put a lot of pressure on equities and make it difficult for them to sustain any kind of rally, if not outright make them fall off a cliff. Continue to watch the dollar rally, it is the stock market's biggest enemy.
The S&P appears to be finishing up a 5 wave advance, if it hasn't done so already. If so, it may mean its final rally has ended, or will at least correct a bit of the 5 wave rally. Tomorrow is the Fed announcement so some volatility later today and the rest of the week is highly possible as investors jockey for position around the fed statement. A sharp erradic rally in stocks would fit nicely into the "blowoff top" scenario I mentioned in earlier posts, so I'm watching for that. If that does occur, it would be a good signal that "the top" is probably forming and the rally will be quickly reversed. That final spike will be the market's last attempt to eliminate the last of the already severely battered bears before it tries to collapse without them.
So the bottom line is that the dollar rally is very bearish for stocks, and a continuation of the dollar's uptrend should lead to the stock market's top and reversal. With the consolidation of the past few weeks in the stock market, I wouldn't be surprised to see a sharp final rally into the wave 2 or B high that will be quickly reversed. The Fed statement tomorrow MAY be that catalyst. Above all else, I'm looking for reversal patterns and 5 wave declines to signal a top is in. Until then, I continue to be short term neutral the stock market.
My positioning remains the same as yesterday.