December Outlook

Saturday, December 05, 2009

Friday's monthly job report proved to be a major market mover beating expectations and fueling a strong bounce in the dollar. The report showed a better-than-expected loss of only 11,000 jobs versus a 125,000 loss economists had predicted and the unemployment rate ticked down to 10.0%. The dollar rallied sharply off the number's release and even the equity markets initially managed a surprising rally. The concurrent rallies confused many traders as it was a decoupling of the very strong negative correlation between the dollar and equities seen most of the year. But, the equity rally did not last long and quickly evaporated. Gold dropped hard and continued falling throughout the day registering 4% in losses.


I keep reading that the short dollar trade is "over-crowded" and that everyone is bearish so there will be a rally. Yet, it seems that when you are still hearing people making such statements publicly, bulls are still around. True capitulation reversals occur when there is no one left to sell so reflexively the market rallies. The key to countertrend signals of over-bearishness is that no one is bullish which is why there's only a handful of people that ever capitalize on the reversals. Anyways, I think the bottom is a long way off in the dollar but short-term rallies can always occur.

Looking at a weekly chart, the dollar still remains within a steep, controlled descending channel that it has been in since June. Friday's sharp rally brought prices back to the upper end of the channel but a breakout has yet to occur. Descending channels, while declining in price have bullish implications upon a breakout to the upside. The measured move to the upside is the height of the channel. If this week were to lead to an upside breakout, I would look for a move to the $79 area for about a 3.5% gain from current prices. I maintain that this is not a bottom in the dollar and much more downside is likely in the long-term.


I posted on Tuesday my belief that a Euro rally could be the fuel for a year-end rally in gold and US equity markets. Yet, the weekly chart shows another tail to the upside as the dollar saw buying against the euro after the Friday jobs report. While two weeks ago the Euro's rally was ruined by a flight to safety after the Dubai news, the rally this week failed because of an improvement in the US economy. The $1.50000 level has proven to be an important inflection point. A solid break through $1.48000 on the downside would signal that the rate of increase has slowed and a euro rally into year end is much less likely.


I was burned 3 times this week buying the S&P 500 through the 1113 level. This matched up with $111.70 in the SPY which I bought on Wednesday, Thursday and Friday. I gave each buy to the low of the day and was stopped 3 days in a row. Each push through the level caused a quick flurry of buying from daytraders and the accompanying momentum algorithms but no sustained buying stepped in to fuel a real push in the indexes. Three push-through failures at the top of the range seem to indicate to me a lack of interest in the stock market as a whole right now. The breakout to new highs for the year 3 days in a row brought no significant buying into the market. The technical level was only important to weak holders who were forced to jump ship when institutions did not join in the buying. I think these 3 days set a weak tone to the market and I am seeing trades on the short side quickly becoming the best momentum trades offered to the daytrader. I am going back to trading individual stocks and giving up on the channel pattern in the S&P.


Gold fell hard Friday dropping 4% on the day as the dollar jumped. A pull-in was expected and is welcomed as gold has seen a 20% rise in just 2 months since the breakout to all-time highs. Prices had become parabolic in the short-term so a sharp drop was reasonable as weak momentum chasers fled their positions. I have been in gold for months now and locked in some gains at $112 and then again at $118.50 in GLD. I will wait for gold to find a support level and look to buy on the uptick. I would expect some basing action throughout the month of December especially if the dollar continues its bounce and equity markets fade. I maintain an extremely bullish view of gold in the long-term. I believe gold is in a secular bull market and I am a buyer on this pull-in.


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