A Dying Bull?

Writing an investing-related email to a friend has put me in the mood to finally write an investing-related post, so here goes:

Looking at trend lines and RSI, the dollar is right at the edge of resistance. If it can break past 77, we could see a pretty big rally in the dollar. If, on the other hand, it bounces down from resistance and falls below support at 75, the articles and newsletters I follow say there's nothing to stop it from falling further until it reaches 72.

Silver has taken a big beating the past few days and is now approaching support at $16. It broke through the 50 day moving average today. I'm not sure how low it'll go if it falls below $16, but when $16 was resistance, $14 was support. Gold has fallen as well, but not as much. The technical picture is similar though. There was support at the $1030-$1035 range. Gold is slightly below that now (at $1028), so that might be enough to say it's broken. The next support level is around $1000.

Now we get to the interesting part. Since August, there's been a very nice channel in SPX (the S&P 500). It touched the upper trend line four times and fell back, and it touched the bottom line three times and bounced up. It is now at the bottom line again, but this time, it's slightly broken through it. (The trend line goes through 1050 and SPX ended the day at 1043.) This is bad news for the bull market, of course, but because it hasn't decisively broken through it yet, it would be premature to declare a new trend is at hand. However, we have other news to suggest that the bull market is on shaky ground. The Dow Jones Transports formed a double top and has broken through support. XLF (the financial sector ETF) is also right at support. Goldman Sachs, the bellwether of this bull market, has turned somewhat bearish, breaking through its low on October 2, and it's decisively broken through its 50-day moving average. It's also broken through support at 50 RSI, which for the past several months has been the point where the stock bounced back. In sum, we're at a potential turning point in the stock market. Unlike previous times, this time GS is showing bearish signals. If SPX bounces back from its current levels, then the bull market should be intact, possibly till the end of the year. (The next target would be 1130 or higher.) If it decisively breaks through support, it'd be wise to get out until the market can find a new level of support.

The thing to watch will be the USD. There's been a very big inverse correlation between the dollar and stocks lately. This might be due to a dollar carry trade similar to what was going on in the yen a few years back. In this case, traders are borrowing dollars at ultra-low rates and investing them in assets have posted a higher return, like stocks (and gold too). Investors have become much less risk-averse lately -- a little too daring, in my opinion. Although there have been a few hints that the dollar is about to reverse course and start heading higher, especially if it can breach 77, it's not yet entirely clear what the dollar will do. In any case, it'll be the dollar that leads, not the other way around.