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January 21, 2010

Great Expectations

Today's session provided deeper discounts on precious metals and related assets. While the action is frustrating, it is not unexpected. We were anticipating a tag of the 200DMA by the U.S. Dollar Index, implying a deeper sell-off would be at hand. The good news is we got that tag today along with a decent reversal:

u.s. dollar chart

The fact that the buck closed in the lower half of its range could also signify exhaustion of the short squeeze hypothesized yesterday. If the DX moves below today's low (without setting a new local high), we'll have a swing high, and the odds will greatly increase that the rest of our scenarios will unfold.

No doubt, slumping prices inflict pain, but the reality is that the markets are doing exactly what we expected of them, so let's resist convulsions of despair until the action diverges from the outlook. Remember that those expectations include seeing a violent PM rally emerge from the dust, so we precious metals bulls should have plenty of time to recapture lost option premiums and enjoy the ride.

As for equities, I was anticipating a quick but nasty correction, and that's exactly what appears to be happening. I doubt the next move higher in the SPX will be as explosive as the one in precious metals, but it should be juicy enough to help mining shares into an orbital trajectory.

s&p 500 daily chart

Also note that Treasuries have retraced, as anticipated, to an important pivot.

30-year treasury chart

The next turn lower in bonds should bring a failure of the 2008-09 lows and ultimately drag the stock market lower... after enough delay for us to finish our final rally, of course!


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