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June 8, 2009

Buck Eye

I'm going to try to hammer out a weekend post even though my energy is spent, and it's not technically the weekend anymore. One of the first thoughts that came to mind while perusing charts this evening was how much more profitable my trading would be if I paid more heed to my own musings. Two weeks ago or so, when the S&P 500 was a few dozen points lower, I was pointing out reasons I thought a pull-back was upon us. Not two breaths later, I noted how crude oil was playing out a pair of T1 patterns which projected a $71 target, and expressed skepticism that equities could show any significant weakness until oil rolled over. Well, Friday both the SPX and crude oil both touched new highs for the spring rally with oil coming within a whisper of our target. Go figure.

oil price chart

So, I'm now looking for oil to back-test the $50-55 area as the dollar unfolds its own T1 test:

dollar index

The magic question for oil... and commodities in general... is what happens to the buck after this test. If it rolls over limply and returns to this week's low, odds would then highly favor downside continuation and a period of devastating inflation. If the buck can conquer the 200DMA and successfully test it from the top side, our mega rallies in real stuff may be put off a little longer. I personally have my doubts about dollar strength because the index should not have slipped all the way to the December low if our currency were going to hold its own here. We should have seen the decline stop at around 81 such that the second down leg would have matched the initial drop off the March high.

As with my prior calls for a decline, I am anticipating a test of the 65DMA on the SPX:

s&p 500 chart

A break below SPX 880 should have bears piling on bets, but I wouldn't trust the decline to extend unless the index loses the more important support of the 65DMA.

I haven't got much to add to the precious metals outlook. I'm still expecting a pull-back in silver to the $14-14.50 range. I must say, thought, it seems odd that gold didn't manage to test $1000 on this run. The action in silver's classier counterpart is looking meek. It's a little too early to be throwing ifs around on this one. Let's just keep an eye on the buck for a couple weeks.


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