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June 4, 2009

Dollar Pivot

There is a ton of fun stuff to analyze this evening, and since I've been pointing out how so much depends on the dollar's behavior, we will start there. Just as all hope was beginning to look lost for the greenback, the dollar index posted a swing low out of the December pivot zone:

dollar index

We look set for some sort of bounce here, and a test of the T1 consolidation zone appears as reasonable a target as any. If the dollar can test and conquer that consolidation, with a close above the 200DMA as final confirmation, markets would be facing another bout with deflationary forces. If the buck cycles lower and comes down to another test the 78 area, the odds would highly favor failure, after which we would be facing devastating inflation. Just what we need when the country is facing a dire lack of savings, eh?

Interestingly, the move in silver out of April reflects the action in the dollar, including a rough-looking T1 pattern and rejection by a significant pivot point:

silver price

So it's possible... and I would say even likely... that silver retreats to test the $14 consolidation zone. For those of you concerned about holding through such a retreat, I suggest consideration of the following hedge: buy the dollar index. First, if the dollar fails to bounce here, your precious metals positions are going to go wild. Second, it is entirely possible for metals to ignore a dollar rally and move higher. I don't know about you, but I like a hedge that has the potential to be profitable on both ends.

If the dollar has, indeed, printed a temporary bottom, we should see continued pressure on equities, as well.

s&p 500 chart

Still, I have my doubts about a sustained pull-back from here. Both the NDX and BKX lagged to the downside... not behavior one would expect at a major turning point... and many of our indicators, such as Advance-Decline Volume and the McClellan Oscillator, are not coming off extreme readings. Also, we have not seen any selling-on-strength in recent days. Therefore, the SPX is most likely playing out an a-b-c correction and back-test of the consolidation breakout.

s&p 500 intraday chart

The a-wave covered about 23 handles, so we can expect a roughly similar drop to begin sometime tomorrow morning. The pivot point at SPX 940 should provide a ceiling for the b-wave counter-move. However, since the line we want to back-test is slicing down around SPX 915 right now, we can anticipate the market turning down in the high 930s. It's a neat setup, and if it plays out as such, traders would also be offered the opportunity to try a long trade with a tight stop as we back-test the consolidation trend line.

Commodities took substantial hits today, and it would be easy to attribute the selling to dollar-induced profit-taking, but traders should be wary of larger moves. As several commentors have been fond of pointing out, world demand should remain dry for some time (save for accumulation by China), and we also have some technical warnings:

oil price

The high of the current move misses the $71 pivot by a mere $2 per barrel. It's possible oil will make a final push to the target in the coming week and possibly set up an RSI divergence at the same time. If so, I'd probably attempt a short play. I suspect oil will test the larger T1 consolidation around $50. It's fate afterwards will depend on the dollar and our overall inflation outlook.

copper price

natural gas price

Thursday's gonna be interesting.


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