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September 16, 2010

Dollar Flight

A couple days ago I noted that a breakdown in the Treasury bond market could be construed a sign that big money is ready to exit dollar-based assets ahead of the buck's plunge into a 3-year low due next spring. The bearish formations on the weekly chart did not stop market forces from trying to bounce the Treasury market, but that attempt is breaking down today:

December Treasury Bond Futures

Traders should keep a keen eye on the bond market because an acceleration of this breakdown will eventually weigh on stocks.

Of equal concern are recent developments in the crude oil market. Oil is currently threatening a near-term trend line which could lead to a more substantial break lower:

October Crude Oil Futures

I have already outlined to Members how the intermediate oil cycle is set up for a very bearish resolution in coming months, a potential plunge in the buck notwithstanding. If the S&P 500's biggest sector, energy, takes a dive, the general stock market will certainly be unable to escape gravity.

Regardless of these setups, I would not be looking to short equities immediately. First, we need to see a bit of downside follow-thru in both bonds and oil to confirm the outlook for extended weakness. Also, stocks still have a cyclical duty to exceed the high of the last daily cycle set in August. Once that feat is accomplished, we can observe sentiment and money flow for clues the market is ready to roll over.


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