Is Dollar Toast?

For weeks I've been touting that stocks are in a cyclical bear market and that current rally should be short lived, meant just to revert bearish sentiment. My arguments for this case have been a cyclical nature of the stock market, a very obvious five month topping process, lack of real leadership and the fact that bear markets usually don't bottom in just one phase.

But the current four week rally actually gives the appearance of a solid new uptrend. First of all, it has simply gone way too far. Not so much in percentage as in retracement terms. Bear market rally simply should not retrace 70% of the previous drop. Mind that NASDAQ is actually only a couple of percents below the bull market highs. Secondly, with the exception of the lack of a valid follow through day near the bottom, it has been a high quality rally. From the beginning of this uptrend, we have witnessed only one distribution and both two day correction were heavily bought as hammer candles followed by instant breakouts indicate. This Thursday's heavy volume breakout above MA200, the final technical resistance level, siggests something significant may be hapenning under the surface.

Mind that such strong late breakout often lead to reversals as big money sells into buying frenzy. So we still have to be cautious. But Friday's action looks more like consolidation than exhaustion, so I suspect new highs will be reached soon. Of course, sooner or later market will have to go into a more significant correction and the rally out of that correction will give us clues whether this bear actually has bottomed on October 1st or not.


The next very important evidence for the bullish stock market case is the dollar. After rallying sharply out of its three year lows, the buck could not find support during correction and is now on the verge of touching the final support line again. If there is any chance that the dollar continues the uptrend, it should reverse and rally violently above MA200. If that doesn't happen in the next week, chances are high that dollar three year cycle topped in only two months, which means that stock bear market is definitely over and that we won't see a decent correction in gold for the rest of its bull market.


Speaking of gold I think the yellow metal will soon give a stab at the ascending resistance line, which we already draw several times, before going into a brief correction (coinciding with the dollar briefly rallying from oversold conditions). It should then consolidate somewhere above MA50 before resuming the uptrend. If (and only if) the dollar is finally toast, I believe we won't get a decent correction and a buying opportunity in precious metals until the next short term spike which could be several months from now. Not to mention that an extreme parabola could also mean that gold bull is over. But it's way too soon to discuss this.


So, the past week completely reversed my expectations for gold and stocks, but that is the nature of all markets as they always fool the majority. That being said I must also point out that almost ALL bear market corrections look like that! Everytime the market falls far off its highs, a rally which will give the appearance of a high-quality uptrend will be produced. When the last bearish analyst throws in the towel, when bullish sentiment reaches extremes and when "everything is fine again", then is the time when the most dramatic plunges happen. So, let's just stay cautions. Day-to-day based analysis is still the best tool.