Great Economic News Today!! Stocks Struggle, Nasdaq in the Red, Dollar Surges, Not Quite What You'd Expect...

Great economic news came out today on retail sales and consumer sentiment data that really blew away what economists estimated the numbers would be. So the Dow should be up 200 points right? The recovery is on track so it's Dow 30,000 in a few years right? Well the Dow has been trading up a meager 40 points all morning and the Nasdaqs have actually turned negative at this time with the XLF and Russell 2000 about to go red too. Why? It's all in the US dollar. The dollar rallied big this morning, which has put tremendous pressure on the stock market. Earlier this week I said in response to the stock market reversal and dollar strength after the great non-farm payroll numbers:

The stronger dollar and weaker commodity action is putting severe pressure on the stock market. This all started with the dollar rally after the good jobs report Friday. So if you follow financial news and feel it moves the market, then think about this: the stock market rallied primarily on dollar weakness as you can see from the inverse tight correlation to the US Dollar Index (DXY). This is all happening when the so-called "recovery" is getting its legs. Now a great jobs number comes out on Friday and the dollar rallies because investors fear the Fed will raise rates sooner than expected. This causes stocks to sell off. So the stock market is rising on the hopes that the recovery is on firm legs but sells off when things get too good because the Fed might raise rates. So if good news and a good recovery won't push the stock market higher, what will? Darned if it does and darned if it doesn't. The bulls are in a tough spot here. Click here for full post

Well today, similar action occurred. The retail sales and consumer sentiment numbers blasted estimates, coming out much better than expected. Yet the stock market is struggling to stay in the positive as a whole. Why? Because the dollar rallied again on this good news as you can see from my USD/CHF chart above. Most of the rally from the March 2009 lows have been on dollar weakness, so it was just that prices rose mostly on dollar weakness; not that any fundamental or intrinsic value in stocks occurred. So when the dollar reverses, so will the stock rally.

The dollar is surging hard against the euro and swiss franc, but isn't performing as well against the British pound and Australian dollar so I'd like to see to dollar make new highs against these other currencies soon. But as it stands now, the dollar bull run has resulted in commodity weakness; gold, silver and oil reversed sharply this morning; which will also put tremendous pressure on the stock market. So the market is set to fall on bad news, and struggle or fall on good news. Again, the bulls are in a tough spot here at this juncture. I spoke about this also earlier this week, click here to view that post.

With that said, on the 15 min S&P cash index chart attached you can see it traced out a 5 wave rally which was confirmed by the Dow, but not the Nasdaq Composite or Russell 2000. But with 5 waves up from the lows, caution is still warranted for the bears at this point. I'm still short term neutral (long term bearish) the stock market until we get solid evidence of a top, and I'm still short term and long term bullish the US dollar.

Market Remains Range Bound; Gains From Here Should be Hard Faught, and Short Lived

The market shot higher out of the gate this morning, fell back a little bit, then traded sideways the rest of the day. It rallied shortly after my post yesterday (click here for yesterday's chart) which pointed out the weakening momentum behind the downtrend, and then continued to rally higher this morning. The Dow actually created an inverse head and shoulders pattern on the 5min chart as well. This rally occurred at the bottom portion of the range, telling us the market isn't ready to break out of it in a decisive manner yet. Usually consolidations, or triangles, occur as a pause in the previous trend before spiking one last time in line in the previous trend's direction. In this case, that direction would be up. So it would not be surprising at all if we see some follow-through with this rally in the coming days, and probably get a spike to a new high on the year in the S&P cash index above 1119.

However with so many divergences in other indices and sectors, and the fact that even the euro didn't rally with the stock market today and precious metals continue to weaken, it tells me that any further rallying to new highs will probably be by the S&P, Dow and maybe the Nasdaqs all by themselves. The amount of indices, sectors and markets, charging higher to new highs is getting smaller and smaller. So any spike above 1119 in the S&P should be short lived, and worse case for the bears would be that it does a "blow off top" like gold did. But the reversal from that top will be just as fierce as the climb higher was.

So I remain short term neutral on the stock market and long term bearish. A solid close beneath 1085 will open the door to possibly a major top being in place, while a break above 1119 should be short lived and reversed shortly after.

Decline Weakening Short Term and at the Bottom of the Range; Decision Time for the Market

Precious metals continue to sell off hard, but the US dollar is having trouble maintaining its upward momentum and the stock market is looking very "bottomish" as its past two declines have been very choppy and hard faught as seen on the S&P 5min chart attached. This "bottomish" behavior is exemplified by the fact that the S&P is right at the bottom portion of the range its been trading in the past few weeks. So the door is open for a sharp rally from current levels, however it's not required.

So it's decision time for the market. A solid break and close beneath that range, around 1085, should lead to acceleration of the downtrend and possibly align the stock market with precious metals, the Russell 2000 and the XLF by forming a major top. OR, it will bounce off the support and rally within the range further torturing the bears.

I remain neutral the stock market in the short term until the range is broken significantly.

Stock Market in a Range, but Bearish Commodities and Bullish Dollar Will put Downside Pressure on it

The stock market was very weak today with internals registering 2.24 down stocks on the NYSE for every 1 stock trading up, and 82% of all NYSE volume to the downside. The stronger dollar and weaker commodity action is putting severe pressure on the stock market. This all started with the dollar rally after the good jobs report Friday. So if you follow financial news and feel it moves the market, then think about this: the stock market rallied primarily on dollar weakness as you can see from the inverse tight correlation to the US Dollar Index (DXY). This is all happening when the so-called "recovery" is getting its legs. Now a great jobs number comes out on Friday and the dollar rallies because investors fear the Fed will raise rates sooner than expected. This causes stocks to sell off. So the stock market is rising on the hopes that the recovery is on firm legs but sells off when things get too good because the Fed might raise rates. So if good news and a good recovery won't push the stock market higher, what will? Darned if it does and darned if it doesn't. The bulls are in a tough spot here.

In the short term this is irrelevant. But what my point is-is that it's primarily dollar weakness that fueled the stock market higher from the March 2009 lows. With a weaker dollar, stock prices, not values, rose. The weaker a dollar is worth the more dollars it will then take to buy the same stock a few days ago. So the real story is the US dollar here. And it appears that it has formed a major bottom.

My attached S&P cash index daily chart shows the S&P in a range. Until that range is broken significantly and closed outside of, then we'll assume we'll be bouncing around here for a while. But with commodities topping and the dollar bottoming, the evidence is building that the breakout of that range will be to the downside, and perhaps soon.

Now look at the daily USD/CHF chart attached and notice the strong surge higher after several weeks of bullish divergence on the RSI. The last several weeks of the dollar's decline was not only very very crowded, but also had severely weakening momentum with every new low during that time as you can see from the RSI which failed to make new lows with price. Now the shorts are getting scared and covering their butts. The more the dollar rallies, the more shorts will get "squeezed" out of their positions. As crowded as this trade is, it would not be surprising if it just kept rising more and more with little break.

The last two attached charts are of gold. You can see on the intraday chart that gold has been massacred after its huge surge near the $1,230 level late last week. As commodities often do, it appears gold made a blowoff top and is now reversing just as sharply as it rallied. The count remains valid and gold should move inverse the dollar just as fast.

So I'm short term bearish gold and silver; short term and long term bullish the US dollar; and neutral on the stock market until we get a clean breakout from its range.

Meredith Whitney; Big Financials Bear

For those of you out there that like the fundamental side of trading/investing, here's a video from CNBC with Meredith Whitney who has been stellar the past couple years in identifying strenghts and weaknesses in various individual financial stocks, and financials as a whole. What she is saying here in this interview is one of the many reasons I'm short the XLF, and have been for a while.

The market sold off today but so far has no follow through. It's possible to count the decline from the highs of the year as impulsive, but probably needs to subdivide one more time to a new low to be perfect. Once structure unfolds more and makes things clearer, I'll post my opinion of the short term direction and key levels to watch for. I remain neutral in the short term for now, but a break of 1084 in the S&P cash would get my attention for the bearish side.

US Dollar is Key, Precious Metals Probably Topped, Stock Market Should Follow Soon

Just a quick update this morning on a few things I think are significant. As I've said many times, the US dollar is key to the stock market's movement. A dollar bottom and rally should result in a stock market top and reversal. You can see from my primary wave count on the attached chart of the 4hr USD/CHF that it's possible to count the rally from the lows as impulsive. But as you can also see from my alternate count chart below it is that it's also possible to count the rally as just an A-B-C correction which will most likely lead to lower prices soon. This should clear up as time goes by and wave structure unfolds. But now that we have the two top wave counts, we can watch the action from now on and see what fits best. The bullish count does remain my primary count right now though.

The reason the bullish dollar count is my primary count though is because of the action in precious metals. Gold has been in a blowoff top for a few weeks now but appears to have made its top. Last Friday, and halfway into today's US session, gold has dropped $83, or 6.8%. You can also see from my attached gold futures weekly chart that in addition to this, gold made a bearish weekly reversal candlestick. If gold topped, it will be hard for the dollar to make a new low, which means the current dollar count should be bullish as of right now.

The stock market is struggling to find direction, but the indications in the US dollar, precious metals, and several of the smaller indices indicate that a major top is forming and can give way at any time to a major sell off. Until the stock market gives us clear signs of that top occuring, I have to remain neutral in the short term, and of course I'm still very bearish in the long term.