WMA - Weekly market analysis, 28 March 2010

/DX ($DXY) – USD Index
On a monthly basis, the USD is in a real bull rally. I have read about some calling it a bear rally, and Russell Napier making a call that the USD is now in a real bull market for 2010 (at the start of this year). The weekly charts indicate that this rally has legs to go for another 2-3 months at least, reaching about 84 on the USD Index. Meantwhile, on a daily basis, the USD appears a little over valued and should have some moderation over the next week, likely not before a pop by Wednesday. I am looking for a monthly close of >81 for the USD Index.
Fundamentally, the USD is under a little stress from the news that Greece may be getting things under control, and some strength in the Euro. But I see this as a rally relief, with Greece looking suspiciously like another Lehman Bros – denial until the true end.
Technically, the rally seems intact, and fundamentally with the Euro being weak and at threat, all points to a good rally in the USD… I am with Russell Napier.

SPX/SPY – S&P500 Index
On a monthly basis, it appears that the rally just borne out legs to run further, and much further at that. I was at a Ben Miller talk last Thursday night, and he was really bullish! Historically, since 2003, a bearish divergence has played out spectacularly in 2008. It does look very bullish on the monthly charts…
The weekly charts had indicated a very strong bearish divergence that cumulated into a January tank in the SPX, but caught many in the know off guard and reversed to make a higher high. This higher high is a cost of accentuating the bearish divergence. I once told my friends that the higher this rally goes, the bigger the risk of a bigger tank to come. I see that… the weekly charts are not showing that the January tank was not the manifestation of the bearish divergence, but only the back of the bull. That is to say that there is more of a bull (or bear) rally to come and the bearish divergence is building up to a greater fall. I call to mind this anecdotal phrase which I came across recently, “Buy when they cry and sell when they yell”. The news have started yelling about a 52 week high, as well as having clocked the 6th UP week for the SPX… it is about time to sell perhaps, but not before allowed to do so, and that would happen with a real mania, which should be just around the corner mid next month. ALL my indicators are showing the build-up of the bearish divergence, and on the weekly charts, it would be more powerful than on the daily charts. The daily charts indicate a stall, and we are looking for March to close closer to 1152, with the concomitant pop in the USD. Thereafter, I am expecting the final leg of the rally.


/GC – Gold futures
On the weekly Gold futures chart, gold is in a mild downtrend but looks ready for a pop sometime soon, but not just yet. The daily charts show that 1088 is a formidable support, and that Gold is in a trading range. Although last Friday gold had a good pop up, I am not convinced of a real uptrend as yet. The indecisiveness of Gold can be looked upon as strength in the face of a rising dollar, but I do agree with Dr Elder (met him about 2 weeks ago) that Gold is looking for more downside in the coming months. I have my own reasons as well as you can see in the Silver charts below…

/YI – Silver futures
Despite a valiant rally from 14.50 to 17.50, Silver looks weak on the weekly charts (pun not intended). The daily chart show a clearer picture of Silver’s intent in my opinion. A recent double top was made and I am expecting silver to fall lower, possibly to 15.50. Rallies have been weak, unlike Gold, and although Silver usually follows Gold, it is having a mind of its own of late. The price action pattern of a HH-HL-LH-LL-LH is done on the weekly chart over the past 4 months and 15.00 is the trigger for a major low. Now, this may be strange, but the daily charts is mapping that pattern out also over the past month, with the trigger at 16.60 for more lows to come.

/CL - Crude
The weekly crude charts clearly show an uptrend that is tiring out. Having made a strong upward move in 2009, the sputtering rallies in 2010 indicate some sort of easing for a correction. It looks like there would be another 3-4 weeks of seasonal that may play out for a spike to 90, but beyond that, I doubt any further price move above 90. The indicators are showing bearish divergence building up over the past year. Recently, very bullish calls have been made on the basis of China’s economic activity but I have long been a skeptic of China, although I know it moves/leads the global economy to a limited extent. This comes from a Western interpretation of Chinese culture, where historically, all Chinese glory always crumbles at the hands of corruption. Not out to say that the current China is corrupted, but it is a strong sense that history and culture is very unlikely to change in just this generation. Back to Crude daily chart, there is a correction resulting from a bearish divergence being in force right now, and should last another week or so, looking at 77 for a base to reverse.

FXI – China Index fund (proxy for the China market)
The weekly charts show of a spectacular recovery in 2009, but late 2009 and 2010 has shown much weakness, possibly an effect of the tightening measures by the Chinese government. While the SPX has made higher highs (despite weaker indicator signals), the FXI weekly bearish divergence played out very well and never clocked a higher high, but rather 2 lower highs at best. The daily chart show a squeeze and resolution of this in the coming days should indicate the short term move.



Overall strategy for the coming week(s)
The precious metal and S&P500 together with a rallying USD is forming a coherent picture yet to be confirmed. This forms a hypothesis or plan that the market will be charting over the next few months. I previously thought that the January 2010 correction would play out as a reversal but it did not happen, and following that instead was a new 52-week high rally ensuing on weak indicator signals.
Going forward, April is one of the most bullish months, and after a small correction this week, I would not be surprised to find another leg of rally. But towards end April, I’d be even more wary again!