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May 9, 2010

Mini-Crash Aftermath

That was quite a week on Wall Street. I haven't decided, yet, whether it was good or bad I was on vacation! The question on everyone's mind, of course, is whether Thursday's mini-crash signals the return of the bear or was an anomaly caused by rogue computer trading programs. No matter how much we sit around a debate the issue, there is no way to determine an answer other than to watch what happens in the coming week. If the mini-crash was driven by computer error, stocks should snap back above the 65DMA quickly. If stocks linger, however, there is probably more to the selling than just a computer glitch.

If the action in the buck has anything to say about next week's prospects, we have a fairly good chance of seeing that snapback.

US Dollar chart

The panic buy in the buck was induced by a panic sell of the euro last week. However, we should take heed of the multiple warnings coming out of Europe this weekend by finance ministers who are pledging to defend the euro. Historically, it has been a very bad idea to take these warnings lightly. When a central bank wants to manipulate its currency, it can do so with surprising effectiveness over the short to intermediate-term. I suspect these efforts by Europe will produce a euro rally in coming weeks, thereby knocking the DX lower.

Given the persistence of precious metals despite a rising dollar, anything that gets the buck moving lower should induce the parabolic moves we've long anticipated.

Weekly gold prices

weekly silver prices

Mining shares were hardly touched during the panic and are set to outperform the general market as gold and silver rise. If the stock market manages to snap back, as well, the gains in mining shares could be truly spectacular.


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