Markets at an Inflection Point

Before we get into today’s post, a bit of housekeeping: regular readers have become accustomed to finding a regular weekly re-cap of the markets here, often with a look at the week ahead at the end. Last week, due to my travel schedule, we had no re-cap, but it is also an opportunity to move in a slightly different direction.

In an effort to (hopefully) add more value, weekend post will shift to a brief review and a more extensive look forward, including my top trading themes for the coming week. I’m happy to share my ideas but, as always, remember that these are my trading themes, so the reader is urged to exercise judgment and/or consult their own advisor before trading.

Now, on to the the current market picture, as Monday was an interesting day. Let’s begin with the US Dollar, remembering our macro stance that all the other markets are trading off the greenback. My call has been for support to come in around 76 on the Dollar Index, and last week we just touched that level, in a fairly wide range of trading, but the week closed where it opened, forming a “long-legged doji” candle on the weekly chart. This was followed on Monday by action that saw the dollar rise, and get pushed back down to the opening level at the close, forming a “gravestone doji” on the daily chart above the 76 support level.

What does all this chart jargon and Japanese candlestick arcana mean in real terms to us? Essentially it means that the downtrend in the dollar has momentarily broken at the level where we expected it to break, and there is a possible reversal in the works. Indecision at an inflection point. Now let’s look at other markets to see what they are saying.

The long bond and the benchmark 10 year both gained slightly after putting up “bearish engulfing” candles last week, and the long bond still looks like it’s rolling over, though Dave Fry correctly points out that it has been deadly for short sellers recently. Whether it’s selling the QE news or bond vigilantes stepping in, the Treasury market is also showing some indecision here.

Next, on to stocks. The long post summer rally in the SPX seemed to run out of gas at the end of last week and on Friday, another doji here too. Monday we gained a bit on lighter volume, but the real story was after hours, where Apple and IBM were sold off after earnings. IBM had some disappointing data, but how do you explain Apple selling when the only disappointment was that they couldn’t make iPads fast enough to keep up with demand? We’ll have to watch this. There seems to be indecision here as well.

Finally, on to gold. This market also appears to be showing signs of exhaustion after an impressive bull run. Bearish engulfing on Friday and…you guessed it…another doji near the Friday close on Monday. More indecision.

The big picture here: my overall theme is intact for the moment. Markets got out in front of the Fed after Jackson Hole, priced QE in, and after Bernanke’s Friday speech in Boston we are taking a step back to try to figure out where we go from here. The US Dollar has led all the way. Now it seems to be finding near term support and the markets are at an inflection point. Let’s see what happens.

(click on charts to enlarge)

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