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May 23, 2009

Winds of Change

Despite its mundane nature, Friday's session was beautiful for equity bears. Bulls thought they had a bottom in place after the morning drop was reversed and then, following a long consolidation pattern, price broke to new highs just after 3:00. However, just as has repeatedly been the case in recent days, the breakout was to be sold, not bought. Price fell throughout the last hour, taking the SPX to a closing loss. And when I looked at the S&P 500 daily chart just after the close, something special occurred. My magic goggles lit up for the first time in a couple months and showed me this:

s&p 500 chart

The 60-min chart is also unfolding just as expected:

s&p 500 intraday chart

Resolution of the triangle target roughly SPX 830. Interestingly, the rising 65DMA sits at SPX 822, so this triangle pretty much sets us up for the reversion we've been anticipating. A quick dive to the 65DMA would also finish unwinding the McClellan Oscillator and set us up for at least a moderate bounce:

stock market indicator

We're also facing a dollar chart that looks ripe for a bounce:

dollar index chart

Since March, a weak dollar has been supportive of equities... until this past week. We have now witnessed four consecutive days of equities falling along with the buck. What do you think will happen to stocks the first time the dollar has a strong up day? Again, I have a suspicion we'll find out Tuesday. In the last post I mentioned that the buck seemed poised to revisit the previous pivot at 78.50. Such weakness is not out of the question, but would put the buck in a direly bearish position. At the risk of sounding dramatic, I hope for the sake of the country that the dollar rallies from here.

Now, I'm sure the lot of you are staring at the massive $288M of buying-on-weakness posted for the spyders. Don't fret it too much. BoW numbers are less efficacious in bear markets than SoS figures. If we saw several days of this type of buying after an extended drop, I would pay more attention.

Let's have a look at precious metals. Gold, silver, and miners are all coming up against resistance:

gold chart

silver chart

gold miners chart

platinum chart

So, given resistance levels and lagging platinum price, do we get a pull-back from here? My answer is: probably, but who cares? Nothing goes straight up, and bull markets are designed to take out resistance levels. Remember my adage that in a bull market, surprises come to the upside? Let's say there is a 90% chance of a pull-back here, but if the 10% surprise were to happen, we would see a huge surge in price in a short period of time. Do you really want to get cute here and try to improve your basis by five or ten percent? Sounds like stressful work to me. I think I'll just sit tight until the bigger picture changes. And, no, Gary is not a guest writer today.

I've had my eye on natural gas recently, but have yet to take any action.

natural gas chart

Winds of change are blowing in natural gas, so I certainly wouldn't blame any speculators from taking a position in anticipation of the low holding. I tend not to take positions in baby steps, though, so I continue to wait for a better-defined basing pattern.

Okay, folks. Have a great weekend. It's BBQ ribs, wine, and friends at the family HQ for us. Hope y'all have some good stuff planned, too. See you Tuesday.


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