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October 7, 2010

Bear Market Test

An important test of my thesis that stocks entered cyclical bear mode off the April high is approaching. Both stocks and the dollar have seen fantastic moves over the last few weeks... in opposite directions, of course... and the nature of the impending corrections of those moves will tell us a lot about the outlook for equities. Based on cycle analysis, the details of which can be found in the Member Letter, we know that the buck should form a short-term low in coming days.

weekly dollar index chart

The bounce out of that low is likely to induce a reflexive correction in the stock market.

s&p 500 chart

During cyclical bulls, minor-degree corrections typically hold the 65DMA. Therefore, if stocks can find find support in the vicinity of that moving average, the bear case will take a knock. On the other hand, if stocks retreat more firmly, bulls will have to be very cautious since stocks will then likely be too weak to return to new highs.

 

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