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The Stock Market BarometerStock MarketBarometer
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WEEKLY REPORT
(03-28-2010)
Blowing in the Wind
Youll notice that Bush never spoke when Cheney was drinking water;
check it out!
Robin Williams
We are seeing some interesting developments in the markets so I want to
jump right into it and save all the social and political commentary for the
end. I would first like to focus on the US dollar since it is the hot topic ofconversation in the media, and its price movement is subject to a lot of
misinterpretation. The general line of thinking espouses a new bull market
for the greenback given the fact that the US economy is on the mend. As
you know by now I dont believe the economy has bottomed and I
certainly dont buy into the idea of a new bull market for the greenback.
Yes, we are experiencing a reaction and its one of the largest to date since
the dollar topped in 2001, but that doesnt mean its a new bull market.
Whenever you want to see the big picture in a market, it helps to get awayfrom the here and now, and the best way to do that is with historical
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weekly or monthly charts. Here I have posted a twenty-year weekly chart
and I would like you to take a look at it:
The obvious thing that sticks out is the massive head-and-shoulders
formation with the neckline coming in at 80.35. This is a formation that
took the better part of twenty years to complete and included a bull market
top in 2001. Since the top was put in we have seen a sustained move down
that produced two lower highs (short horizontal blue lines) mixed with
reactions of 10% or more. Today we are in the midst of a third reactionand I am convinced that it will also produce another lower high. Recently
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the US Dollar Index moved back above the neckline but that happened
with the previous reaction as well so you shouldnt read too much into it.
A week ago the US Dollar Index also closed above strong resistance at
81.32 and closed out the week at 81.60. The dollar is not yet overbought
on any chart (daily, weekly, or monthly), but it is close. I suspect thatsometime within the next week or two the dollar will test strong resistance
at 83.35, it will become extremely overbought as it does so, and well see a
top in that area. With that said there is still good resistance at 82.41 to
overcome and it could also produce a top. Thursdays intraday high at
82.24 came very close to testing the latter support level and I would look
for another test this coming week.
SUPPORT RESISTANCE
SPOT US DOLLAR 81.32 82.41
80.16 83.35
77.92 84.89
77.02 87.25
Why is the dollar so strong? I normally dont concern myself with the
why behind a movement, but this is an interesting case. The worldeconomy has been deflating for almost three years and, as a result central
banks around the world have been printing obscene amount of fiat
currencies in an effort to reinflate the economy. The US Federal Reserve is
the leader of the pack when it comes to this printing mania. Of course this
alone will not produce a rally. What produces a rally is the fact that most
debt around the world is denominated in US dollars and deflation reduces
income, therefore raising the cost of maintaining that debt in real terms.
Thats where the demand for dollars has been coming from and it hasoffset the significant decline in the foreign appetite for US debt. Of course
the world goes about making adjustments, and that is what is happening
now. Theyll cut costs, reduce debt, cut back on the consumption of raw
materials, and when they are done the dollar will roll over and fall. My
guess is that we are almost done with this adjustment process.
Although the dollar has been on the rise and currencies like the Euro has
been taken out to the woodshed, I would like to draw your attention to aninteresting phenomenon:
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The Swiss Franc has given up very little ground and both the primary trend
as well as the secondary trend is headed higher. The reason for this is that
in the final analysis the Swiss will always protect their principal business,
money! The Swiss have been in the money business for four hundred years
and will remain in the money business for the foreseeable future. That
means they most maintain a strong currency in spite of all the rhetoric to
the contrary. Problems within the EU with Greece, Portugal, Ireland, and
Spain, as well as the staggering debt load in the US, will continue to drive
investors to the Franc for a long time. Thats why Ive always
recommended it to our clients.
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Perhaps the most interesting market, and certainly the most misunderstood
market is the gold market. The misunderstanding is due to a blend of
ignorance and emotion, and it causes investors to buy high and sell low.
This type of behavior has always dominated the gold market because it isthe only real store of value that exists in the world today. Below I have
posted a six-year weekly chart and I would like you to take a look at it:
Aside from the obvious that we are in a bull market, there is one very
important feature to grasp, and that is the fact that gold is undergoing a
period of consolidation right now. We have seen this before, I have
highlighted three such periods on this particular chart, and they all end the
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same way, with an upside breakout and the gold price moving
considerably higher.
Most analysts are inexperienced when it comes to gold and they miss this
aspect of the yellow metals conduct. Actually since the bull market beganback in 2001 we have seen five such periods of consolidation, and they
should be appreciated for what they are, a signal of higher prices to come.
The current consolidation is occurring within a range that stretches from
1,048.90 on up to 1,148.70 and is slowly shrinking, another feature that
occurred in all of the previous consolidations. Unfortunately, most
investors misinterpret this behavior as a sign of weakness, and having
bought at higher prices, they bail out just when they should have been buy-
SUPPORT RESISTANCE
SPOT GOLD 1,090.0 1,148.7
1,077.6 1,158.2
1,048.9 1,219.2
999.4 1,298.1
ing. Thats the inherent sadistic beauty of a gold bull market, you knowits a bull market, you know the price is going higher, and yet you lose
money! In the gold pits human emotions play on investors like no other
market on earth. Everybodys in for the long run and yet everybody is
upside down.
On Friday the spot price for the yellow metal closed at 1,107.10 and that
was a gain of thirty cents for the week. Yet if my e-mails are any
indication, you would have thought that the gold price had fallen throughthe floor and gold bugs were being force fed to hungry lions. I warned
many of you months ago that volatility would increase and that is exactly
what we are seeing. As for the immediate future that has so many investors
captivated, I wouldnt be the least bit surprised to see the yellow metal fall
down to the 1,048.90 area one more time before turning back up for good
and that is reflected in the following Point & Figure chart:
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You can see a bearish price target of 1,040.00 and that ties in nicely to the
support I mentioned earlier. What happens if support at 1,048.90 fails tohold? Then we more than likely fall down to support at 925.00 which is
the bottom band of the ascending primary trend, but if history repeats itself
as it has on four previous occasions, gold will hold and head much higher.
I will even go so far as to say that well see it start the move higher in
April.
Now lets turn our attention to the bond market as this week investors
decided that US debt is not such a good deal. There were two separateauctions this week that went poorly to say the least and that drove interest
rates to the highest level since December:
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Like so many other markets, we can see the formation of a large head-and-
shoulders pattern over a long period of time. Over the last two weeks the
bond market sent an ominous signal as it broke down below the neckline
and it hasnt looked back. Most people fail to understand the consequences
of such a move as higher rates mean that investors see increased risk in
holding US debt and it increases the cost of doing business/servicing debt.
This comes at a time when the economy teeters on the edge of a
deflationary abyss and higher rates are just the ticket to push it over theedge. For people who are indebted, the rising dollar together with the
rising interest rate is a double whammy that most will not recover from.
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That just leaves us with stocks. The Dow continues in a liquidity drenched
world of its own and that is the primary reason behind the sharp grinding
move higher shown in the following chart:
The Dow is climbing at a greater than 45 angle and that is always
dangerous as the slightest correction can drive it below the bottom band of
the ascending trend line. You can see that in spite of a small gain on
Friday, the Dow barely closed above the line. You can also see that theDow is extremely overbought and yet the RSI and MACD are still pointed
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higher. Only the histogram is declining. This last week we saw the Dow
climb above good resistance at 10,817 and it really hasnt faltered although
it did fail to hold on to good gains from early morning rallies on both
Thursday and Friday. The question as to how high the Dow can go is a
good one as there is no further Fibonacci resistance until 11,245, and this
corresponds nicely with the 11,250 price target from the preceding Point &
Figure chart.
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Personally I think the Dow is to be avoided at all costs. For those of you
who bought the Dow on the major buy signal two weeks ago, I would
think seriously about taking profits at the next new intraday high. With the
Dow now sporting a price/earnings ratio of 20, and an average yield of
2.6%, its about as expensive as its been in a long time. Furthermorevolume has not improved telling me that the large investors are still sitting
on the sidelines. On the other hand there is no technical justification to sell
the market short so all you can do is sit on the sidelines, watch, and wait.
We are on the verge of another earnings season and so far profits are the
result of cost cutting rather than increased sales. Ive been around long
enough to know that if you cut too deeply into your cost structure sales
will suffer, and I believe thats where were at right now. I suspect profits
will disappoint and that has yet to be priced in. As usual, patience isrequired.
In conclusion we continue to be force fed the notion that things are getting
better in the United States. Unfortunately, unemployment and housing do
not reflect the improvement and since most Americans dont have much
else, theyre mired in the quicksand of debt and sinking deeper with each
passing month. New home sales hit an all-time low in February while
inventory increased to a 9.2 month supply. This is not a pattern that is con-
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sistent with the idea of an expanding economy. Meanwhile real M-3
continues to contract and the signs of a further slowdown are everywhere
if one only cares to look.
This week Obamas health care program was passed by Congress and willserve to exacerbate the problems, and the debt in the US. Obliging millions
of Americans to accept a program they cant afford and wont help them
will only create social ill will. In the end the Obama plan will widen the
deficit by trillions of dollars and will cost lives as an inefficient
government loses patients in bureaucratic red tape. Right now everybody
is being lulled to sleep by the tag team of a strong dollar and a strong Dow,
but that is just so much sand in the eyes of the bear. Investors will find out
the hard way that there it is not any different this time around. There is nonew paradigm and history will repeat itself! As usual the average man on
the street will learn this the hard way.
March 28, 2010
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