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June 23, 2009

Fed Up

The dollar took a dive today and I can tell you, with a high level of confidence, why it did so: everyone is expecting the FOMC language out of tomorrow's announcement to sound lax. However, I do not think the markets are in a position to draw easy language from Berskanke & Co. The stock market has a 40% rally on its tail, and oil prices have doubled. Meanwhile, the world is fretting the imminent collapse of the greenback. If anything, I expect tomorrow's wording to hint at some defensiveness toward the dollar, and if so, we could see some rapid downside after 2:15p. On the other hand, if the interest rate cabal does spew easy jargon, I would think the bulk of the reaction is already built in with today's moves.

That said, I amputated a portion of my short position today due to the approach of the 65DMA on the S&P 500.

s&p 500 chart

If the market gods are going to ramp the bears one more time, factors are aligned perfectly for such an attempt. The 65DMA is an important inflection point, and an FOMC meeting can always be used as a catalyst. However, for reasons stated above and because we saw weak volume today, I suspect the test of the 65DMA will fail soon. Usually we will see at least a modest uptick in volume on the final approach if the average is going to hold. However, I am willing to sacrifice a few points to be sure. A close below the 65DMA will see my short position re-applied and then some.

Let's give the dollar a little more attention.

dollar index

A few weeks ago I suggested that the dollar would bounce once it reached the December pivot point and that the nature of the bounce would dictate its fate. At this point, the bounce is looking mighty weak. If the Fed fails to support the dollar tomorrow, and the USD Index loses the Dec/Jun lows, we are back to the nasty scenario involving high inflation sooner rather than later. Precious metals would likely launch, as would other commodities. You can see now why I've been unwilling to let go of my GDX and precious metals positions. While I think the most probably timing for the beginning of a new run is autumn, we are in a fundamental environment where such a move could commence at any time. Didn't someone once say that in a bull market, surprises come to the upside?

gold chart

We could be looking at a short-term bounce in metals. Unlike equities, the metals themselves tend not to start intermediate-term rallies on minor reversal days but rather off of panic sells.

For those of you stubbornly holding the notion that today's candle on the gold chart will send price higher, note that platinum, the market leader, is breaking down, not up.

platinum chart

Our other market leader rallied nicely, but on weak volume

gold miners chart

Natural gas is beginning to give bulls heartburn. A close below the upper triangle bound would constitute and end-run and likely trigger a panic sell. I'd have to eventually buy such an event.

natural gas prices

Okay, if we send everything above through the noise filter, the bottom line is I expect much lower prices in equities in coming weeks (and crude oil, although I didn't mention it above) and moderately lower prices in precious metals. By autumn, I expect precious metals to start higher. Stocks may bounce at the same time, but overall, I expect them to fall harder and bounce more weakly.

Tomorrow is an easy day. We just sit tight and judge the market's reaction to the FOMC. Until then...


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