Market Update - DIA Harami

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The stock indexes are extremely overbought on an intermediate (multi week) time frame. The McClellan oscillator is strongly divergent indicating waning breadth. There have been a couple bearish candlesticks over the last week now as well. The chart of the DIA above shows a harami formed today. At tops these don't always look spectacular because volatility is lower. At bottoms they are usually much more obvious.

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I have opined a bit before on what may come to pass in the bond market. Basically my take is that US treasury bonds are going to be very weak over the coming months/years as incessant issuance of debt starts to play out in the bond market. The pattern on the 10 and 30 year bond yields show inverse head and shoulders indicating potential major bottoms and increase in interest rates and higher yield demand. This would correspond with a large decrease in bond prices. It appears that a large consolidation in bond yields may now be complete and ready to break out. I wouldn't hang my hat in treasury bonds right now for sure.

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Because the pattern identified above may not be standard, please look at the similar basing pattern in gold last year before it went on a major run up. It is very similar and looks to have broken out today. Also the US dollar index broke to new rally highs today, after the expected consolidation.

Just to reinforce the major correlations here, stocks have moved against the US dollar index mostly for the last few years, so this would bode poorly for stocks on continued dollar strength. As I have noted several times in the past, stocks and bonds have traded inversely for the better part of the last year or two. However, I still believe there is likelihood of a decoupling of that correlation where both turn down at the same time.

Basically as has been my mantra for the last 7 months or so, I believe on an investment basis for the longer term thinkers/holders, my take is that the dollar is and will continue to be in a bull market, so keeping money in cash should offer good return. But stocks and bonds are both dangerous, though obviously stocks look so friendly right now. But the point is we are not talking about into next month here, I'm talking the next year and more.