Two Scenarios
Dave will
not be writing today’s article as he is traveling to Las Vegas for this
weekend’s Traders Expo.
For those of you attending, he will be speaking on Sunday morning. In his
place, his long-standing trading colleague Bo Harvey will write today’s piece.
A
few key events have transpired since my comments a week ago. Monday saw
the S&P’s break down below the previous swing low of 1042 after putting
in a triple-top/head and shoulders pattern at 1063, and from there we swiftly
tested the 50 day-EMA and the up trendline off the March 12 low, as you can
see from the first chart below.
As
you can see from the second chart, weekly stochastics are still in undecided
no-man’s land, basically flat-lining. In the near-term, yesterday’s selloff
into the close had the S&P’s closing a whisker under the 50-day EMA, and several
points under the rising trendline from the March 12 lows. The 50-day will
remain a key inflection point today.
Scenario
A is the market
recaptures the 50-day EMA (which has happened on the two previous dips under
it during this current rally), in which case 1052 will mark an initial key resistance/target
zone, since it contains: 1) a gap; 2) a monthly and a weekly pivot; and 3) the
62% retracement of the 1064 high to yesterday’s 1033 low (assuming it holds).
Over 1052, 1064 comes into play once again. Scenario B is the
market breaks further below the 50-day, at which point a retest of the critical
1018-1023 zone becomes the odds-on possibility. 1018-1023 contains a confluence
of: 1) monthly and weekly pivots; 2) the 89-day EMA; and 3) the 10/24
swing low.
Pay
close attention to volume in either scenario, as it will give you a picture
of whether buying or selling pressure is confirming the price action.
Also keep in mind that with the holidays coming up, we could see a few days
of light trading/chop as the market consolidates before heading higher or lower.
In
Forex, the dollar index broke below the key 91.00 level and has now failed
after retesting the neckline of a multi-year head and shoulders pattern.
Under 91.00 the next key target is 80.00-85.00. I suspect that as long
as the dollar remains under pressure gold will eventually get a move over $400,
but gold will not be completely out of the woods until it can clear $410.
Gold stocks have certainly been acting superbly and seem to have discounted
a break through $400. Near term both gold stocks and the dollar are due
for corrective action, but with the break of 91.00 in the DXC, longer
term it appears we are in for a renewed down leg in the greenback.
While
a falling dollar has yet to have any noticeable effect on stocks, an acceleration
of the decline in the dollar towards 85.00 could begin to weigh heavily on equities
going into year-end. As I remember hearing once, “if weak currencies were
the world’s panacea, then Latin America would be an economic powerhouse.â€
A steady decline in the dollar, while thus far not sending any noticeable ripples
through the equity/bond markets, will eventually have negative—