Friday, November 20, 2009

The Deceptively Quiet USD

Looking at the very short term, SPY looks like it will go down. RSI and MACD both touched trend lines, and they declined today. Looking at the price action, the rally from the beginning of November has been pretty unimpressive. In fact, it looks like SPY has been carving out a rounded top. If I'm right about this, we should see about a week and a half of declines. From there, we'll have to reevaluate.

While the March bull could still put in some more gains between now and the end of the year (frankly, I think that's the most likely scenario), the nonconfirmation in small-caps (Dow stronger than S&P stronger than Russell) or financials (and the potential triple top in the Dow Transports) almost certainly means this rally is on its last legs. But I've been saying that for a while, so I'll believe it when I see it.

The much more fun chart to look at is gold, which has been posting new all-time highs virtually every day for two weeks now. Amazingly, the price action has begun to look slightly parabolic. While it's certainly possible the rally could continue higher, unfortunately, for the short term I think gold is getting a little overextended. One source I follow thinks that the absolute highest short-term target for gold is $1174; if it gets there, it's virtually assured to take a breather. In addition, gold market sentiment data are bearish from a contrarian perspective.

Silver and HUI/GDX (the gold stocks index/ETF) were previously not confirming, which is a bad sign, but lately silver has caught up very nicely, including a 5% gain in one day this week (much better than a 1.75% 12-month CD or especially the 0.25% 12-month CD Chase is offering!). RSI for silver broke out of a declining trend line and right now is 65, suggesting there's still room for gains, but conversely, price is touching the September trend line.

For the medium term, we've now entered the seasonally strong period for gold lasting till February, and we're only about halfway through, so I expect gold will eventually go much higher than $1174 before this rally is done, but a correction back to $1080 is certainly not out of the question. This fits well with a recent update from another letter I follow, where the author points out a beautiful parabolic uptrend in existence since April and is bullish as long as gold stays above it (somewhere around $1060 currently).

As for the dollar, the 75 level has proven to be pretty good support. I still think there's much more upside risk than downside risk, especially when looking at a one-year chart. If it can decisively break below 75, then the next target is 74, then 72. After that, it's a long way down to the bottom of the channel -- 69 or below! If it breaks up out of the bullish falling wedge, though, it could approach its 200-day moving average at 81. Either way, the dollar is setting up for a huge move.

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