The Dollar

The dollar is a very key reading to understanding the market action. Above is what the dollar has done in the last month. It has had a 10% rally in the last month. For a currency this is truly garguantan, especially when the reason the dollar is rallying is not due to inherent strength but the weakness of other currencies. While we believe in the intermediate term (3-6) months, the dollar will continue to rally upto 80 or so, at this point in time, it look overextended. Points in favor of dollar bears,

1. The dollar is on a long term resistance trendline (not shown here), which is around 78 on this charts.
2. The recent consolidation in the dollar after this huge move is unhealthy. It has been consolidating sideways to upwards.
3. Bearish divergences on the all the momentum indicators.

Q. Would I short the dollar here and any targets?
We would wait for the stochastics to break below 80. Once that happens, we expect the next stop to be around 75 on the $USD.

Well, dollar weakening would spark a bounce in the commodities. Our guess is oil will see 130-135$ or so, before the dollar starts to regain momentum. We believe silver will atleast fill the gap upto 14$ and gold will rise to atleast 850$.

As for the markets - some of the correlation of markets and oil has started to unravel recently. We still slightly favor the upside for stocks, until the trend is broken. But airlines for sure will get clobbered should oil rise.

A Triangle appears

The Dow and SPY have frustrated the bulls and the bears alike in the past few weeks. Well, the charts show exactly that. We have been bouncing around in a triangle in the SPY, DOW and even in the transports. Triangles are explosive creatures, akin to keeping a spring coiled up within a box. Whichever edge rips, there is bound to be explosive action in that direction. We are slightly bullish still, we believe this market could rip higher next week. We believe the first target on the SPX could be around 1310-1320 or so.
On possible plays, look at XLV (the biotech sector - thanks to hil_feld for pointing us there). The sector has indeed been among the best performing since July 15th. It seems all the hot money is going into biotech. XLV looks to be consolidating nicely on the 200d. It just looks ripe to make another move.

Indices

Above are the charts of the NASDAQ, SPY and TRAN. We got the call for a rally in commodities and the downtrend in the market in the beginning of last week, followed by the nice bounce on friday almost perfectly. Where this bounce has brought is that, we are now sticking our heads up against against the same line which was providing support (for the past few weeks) SPY. Now it has turned resistance.

The charts are not suggesting one way or another to us here, decisively. We are slightly favoring the bulls with odds of 60-40. Our thinking is this, the NASDAQ is butting against the 200d. As seen from the chart in the past, the NASDAQ has always managed to penetrate the 200d, before turning back down. We believe NASDAQ could see the 2450 level. The TRAN has some more space to travel upwards. The first area of resistance is around 5150. Why we are unsure of the overall picture given we have upside wiggle room in these indices, is because the SPY seems to be missing this upside space. The SPY is against lots of resistances and it is entirely reasonable to assume we sell off hard after touching the ascending trendline. But somehow that trendline in our view, is kind of "artificial" or "too visible". It has had too many hits now that it has become so obvious. Previously, we called for that trendline to be broken on the downside, since it was too obvious. We figure, what the heck, why can't it be broken on the upside then? Bottomline, slightly bullish, but we will not prefer to play unless we have confirmation that the trendline is broken. If it does break, we could see 1320 on the SPX.

Next few days

The past few days' action has left many perplexed - as hil_feld rightly commented on one of the posts on this blog. The basis for the movement today was actually bullish in the face of oil going up and Freddie and Fannie getting spanked.

Naturally the question is where does the market head from here? We look at two charts the transports and SPY for an answer
First, the transports has a possible (perhaps sloppy) Head n shoulders. However, the right shoulder looks weak. It needs some more filling. Accordingly, we are expecting at least a rally on the transports to 5150 level - a possible upside of about 4-5%.
Another piece of evidence is more of a contrarian pyschological one. Almost every tom, dick and harry has been watching the ascending line on the SPX and the DOW. Once, it broke, there has been a sea shift into bearish mode. Somehow, we believe there will be another push upside, just because the market has its own mind. Our first target on the SPY is around 130.4.
Finally, the intra day volume in the past three days, is actually showing bullish divergences - low downside volumes and higher upside volume today.

Our vehicle to play this upmove, would be the QLD, since it is now resting on support. Furthermore, the AAPL chart looks prime for another blast upwards.

Where is the money going?

Money has rushed out of commodities in the last month and undoubtedly stocks have rallied. But somehow, the action is not commensurate with the bashing of commodities. We believe this is going into the dollar and the bond market. The bond chart shown above has raced, unlike the stocks which have drifted upwards. However, the chart is unsustainable and is at key resistance levels. The bearish divergences are showing blatantly. Fundamentally, this is the market saying, drive the real interests down since there is no threat of inflation.

We believe, a reality check is imperative here. Stocks rallying on decreasing commodity prices is unsustainable, since there is a fundamental conflict of interest.

On a longer term (a year or so) :-
The US dollar has been rallying based on the belief that the US was first into the recession and the world is lagging 6-12 months behind. And it will be the US bringing the world out of recession. We don't believe this is quite true. The US economy is dominated by consumer spending. The US has proved to be a credit defaulter, with massive writedowns. Consequently, the US will not get loans to consume once again. The world is barfing now because it lent the US economy. We believe the world will come out of it. And ofcourse, credit lenders around the world will continue lending, but only to more credit worthy customers, just not to the US.

The Rime of the Ancient mariner

Above are charts of EXM and DRYS. We got in DRYS too early last time and got burned. But this time around, we believe the shippers are just getting ready to go again. They have broken their downtrend lines. With a commodity bounce on the horizon and the baltic dry index (BDI) beginning to come back to life, these shippers may get back to their top portions for a decent 15-20% profit.

The outperformers -- Russell 2000

Above is a 3 year weekly chart of the russell 2000. This was trending up gently all along and then broke this line at the beginning of 08. We have tried to get back above the line and failed. I believe, if there is another rally (our guess is either tomorrow or on friday), the $RUT will have resistance around 770.3. Our guess is this tryst will fail too.

Momentum indicators are mixed and are not very helpful here.
In case, RUT gets back into the channel, we will change our stance to a slightly bullish one.