US Dollar, Gold, SPXU

Gold looks to have started a correction rather than a simple pullback. So expect prices to head basically lower for a month or 2. Longer term I'm not sure whether this is a major top or just the top of the first breakout move to much higher highs. Often when commodities break to new all time highs, they advance substantially and relatively quickly (say 80-100% in a year or so). This doesn't always happen, but that would be about average historically. So it will probably be several months before we could have a good idea of whether that could be playing out or not. However, the implication for the stock market intermediate term outlook is that stocks will likely pullback if gold does, as the inflationary theme is driving assets up in tandem right now.

For those who may be new to reading the blog, the point of the chart above is that typically markets move up in trends punctuated by relatively similar corrections in price and time. When you see a counter trend move that is larger (about 1.2x as large) and faster than several other corrections that already took place, it is likely that a larger degree move has begun in the counter trend direction.

The Euro is coming down off a strongly technical divergent new high and is at moving average support now. Continuation of the move down, especially with an acceleration, likely means a larger trend change (up US dollar, down Euro) for a period of months or more.

The Aussie/US dollar may be forming a head and shoulders topping pattern, but is coming down off a strong divergence at the most recent high in any case. Again it is near moving average support which should be watched. The Aussie dollar is a big beneficiary of the US dollar carry trade because the interest rate is much higher on the Aussie dollar. I've been constantly bringing up the US dollar in this blog because basically all stocks and commodities are moving inversely to the US dollar. If/when the carry trade starts to be taken off, expect it to be volatile and to drive stock and commodities down, probably sharply. My expectation based off of technical chart analysis and sentiment data is that such a move up in the USD is likely to be happening sooner rather than later. But so far there has been nothing lasting.

The US$/Yen made a big break below the lows from the recent bear market but then made a sharp reversal back above that level. Again for those that read the post on Natural Gas I made a week or two ago, remember the pattern: a long down trend that then shows the longest red candlestick of the whole move as it nears or breaks support. Expect it to be exhausting itself before reversing higher. In this case, there was a nice hammer reversal and a sharp move back up. Sentiment on the Yen is very bullish (see chart below) and smart commercial traders are as net short the Yen as they have been at any time in several years. If the USD holds above the horizontal line on the chart above, it may be a double bottom type chart pattern which could imply significant gains in the US dollar ahead.


The only comments I got on the most recent SPXU trade were people who entered and were still in the trade. So I am going to just treat the trade as still active with a stop at 36.40. The S&P 500 has been oscillating around the 1100 and change level for a while and has formed a third short-term island top with this morning's gap down. I think the break will be down from here, but most indicators are neutral.