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Turkish Delight
March 14, 2012

Your host is exhausted again this evening, but I promised some visuals, so with a Turkish coffee in hand, here goes. The dollar has begun a new intermediate cycle. The current daily cycle sports a Day 10 high, and given the overnight action, the DX will push to a Day 11 high, as well. So far stocks have demonstrated immunity to the dollar rise, betraying a powerful rally in the works. As suggested yesterday, I believe this rally will constitute a blow-off top for equities. I also believe the blow-off is just beginning, not ending.

DX Daily

How high stocks could move is anyone's guess, but cycles are more concerned with timing than prices. Given the potential for a blow-off run, seeing equities perform their final spike higher as the dollar sinks into a DCL is most logical. So our first trick becomes spotting the top of the dollar's daily cycle. Obviously, with only a 10-day cycle count, the peak has plenty of time... perhaps two weeks or more... to print a high. However, I doubt the dollar will rally so long. We can narrow our expectations by watching gold.

Gold Daily

One could argue gold saw a DCL six sessions ago, but for reasons described last night, I believe such an argument to be weak. One may also note that gold is approaching a pivot near $1600 that supported two daily cycles late last year. My expectation is for gold to test that level within the next few days and set a DCL as the dollar's daily cycle tops. Stocks will then go parabolic as gold rallies into a new daily cycle.

If the next few sessions play out as described above, an opportunity to trade precious metals via futures and/or mining shares will be on the table. Keep in mind we will not be buying an intermediate cycle low, so bets should be sized accordingly. The setup could be lucrative, but also swift, as I suspect the rally will last only as long as the dollar needs to find a daily low. Subsequently, gold could complete its intermediate cycle as a triangle consolidation or be dragged down to a lower low in comisseration with an intermediate equity decline.

For good reason, the boards saw a lot of chatter over the beating taking by bonds. However, I would not rush to short Treasuries just yet.

Bonds Weekly

A few weeks ago, I suggested the long bond would test the $135 pivot before attempting a new rally. We are about to get our test. Given the importance of the pivot, I have little doubt price will bounce, and the nature of that rally will reveal the bond market's intentions. A falling bond market meshes with our expectations for runaway inflation over the next two years, so I will keep a keen eye on that chart.

A couple of weeks ago, the most likely path for oil seemed to be downward into an ICL along with stocks. However, with the potential for a blow-off move in equities, oil may take a slightly different path.

Oil Daily

Daily oil cycles tend to run 1.5 to 2.5 months, so crude is about to encroach its timing band for a low. A bounce into a final intermediate cycle peak is therefore quite conceivable, especially if our views regarding the stock market are accurate.

So I believe we have a solid framework of expectations against which to judge coming action. We just need to continue being patient and wait for the market to trap itself into a high-probability setup. And just for the record, the Turkish coffee was to keep me awake... I did not read the market fortunes inside the empty cup. Good night.

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