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May 4, 2009

What Deflation?

So now you all know why I played it safe a cut my risk early Friday. At this point, of course, I wish I had cut all of my short-side exposure, but I can only play what I see. We now have the S&P 500 approaching the underside of a previous trend line:

stock index chart

Now I'd like to go back about a year and show you what kind of candles were posted on the S&P 500 just before each of the major down legs.

historical stock chart

historical stock chart

historical stock chart

stock index chart

Once again, the SPX has posted a tall, bullish candle at a point where bears, including myself, were expecting a downward break. The action felt and acted very much like a short squeeze, and we saw another $73M worth of selling-on-strength to boot. Furthermore, I doubt the market is going to make life so easy for holders of call options. I'd expect some kind of shakeout going into next week's opex.

Silver popped a healthy 60c today. In the weekend post, I mentioned how the price action of the last two months or so appeared consolidative.

silver chart

Along those lines, oil, copper, and platinum were all up over 2% and natural gas was up a whopping 5%. I hope you all locked in your rates!

I'll conclude by postulating that the key to whether the stock market undergoes a correction before seeing an expanded rally or suffers a collapse to new lows depends on how the buck handles coming confluence of support:

dollar chart

Somehow I doubt the market gods will make the play as easy as touching support and moving higher. If the dollar is going to bounce here, it will either move up immediately, without reaching support, or it will break support as a head fake. If it is going to keep moving lower, it will probably bounce right off support to draw in the longs before crushing them. Cynicism at work.


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