Indecisive Mr. Market

The bearish case I laid out on Wednesday was apparently invalidated yesterday with an especially strong rally in the stock market that seemed to be a bounce off support. But then today the market completely reversed itself. In fact, both SPX and XLF broke supports even worse than they did on Wednesday. The Dow Transports look extremely precarious. While it is possible that Mr. Market is merely trying to fool everybody -- bulls and bears included -- based on what's happened, the most likely case now is a decline in the stock market. How low? I don't know, but if SPX touches its 200-day moving average at 920, that's an 11% drop from here (16% drop from its peak at 1100). And if it continues to fall, it looks like there's some good support at 875, or a 16% drop from here and a 20% drop from the peak. This would put us right back at the July lows. Beyond that, it's too fuzzy to say on a short-to-intermediate term basis. (The bear in me would like to point out that eventually -- possibly but probably not sometime between now and the end of the year -- the stock market will test and break its low of 666 in March.) However, we must keep in mind that the stock market could be lying and will launch yet another bull run, in which case my target of 1130 would apply. This comes out to a decent 9% gain. I hate to be wishy-washy, but in this game you've got to keep an open mind. The next few days will give us some clarity.

Gold got away from today's action unscathed, and silver declined, but not as bad as it did on Wednesday. Interestingly, the dollar did not get as high as on Wednesday. This might be significant, though I'm worried I might end up missing the forest for the trees trying to predict things by looking at day-to-day action. But let's give it a try. The dollar posted strong gains today, but gold barely fell. Considering that the two are strongly negatively correlated, this is rather unusual. It could be due to physical demand, in particular demand from India for the festival and wedding seasons. However, I think that investment demand is going to play a big factor in price-setting. Open interest numbers for both gold and silver futures have been very high lately, and the big declines earlier in the week did nothing to dampen interest. This is worrying because it's the perfect setup for a nasty correction in the metals. Though the physical market may soften the declines, it's the paper market that tends to move the price. However, note that it is possible for the dollar to rally and gold to stay relatively stable, as long as the physical market continues buying, and as long as the gold shorts (the bullion banks that control the majority of the gold market on the COMEX) don't try orchestrating a bear raid. Alternatively, perhaps a dollar rally will be the catalyst (as it usually is) for a gold correction that rapidly drains out open interest, but with only a relatively minor price decline as the physical market enthusiastically moves in to buy at lower prices. I admit things aren't very clear -- after all, gold has been positively correlated with the stock market lately, and things aren't clear there either -- but we'll find out what happens soon. And with a bullish candlestick piercing line pattern showing in the USD chart today, the next few days will be very insightful.