Perhaps all of that is just sour grapes because I'm not fully long this rally, but it does seem to reek of some type of steroidal influence or outright manipulation by people, entities, or machine-driven programs large enough to drive a rally like this (and others that have occurred recently). At least in past decades when there has been rip-roaring bull markets, we knew it was people who were phoning in their orders or hitting the buy button. Nowadays, who knows who or what is in charge of these markets?
To be clear, my firm is participating in the upside despite our relative grumpiness. It takes discipline and perhaps a system of rules that you can follow that are stay in / get out decision-makers for you. Left to our own emotions and on-the-spot judgments, we humans will almost invariably exit rallies too early or hold onto losses too long. Fortunately, our firm operates utilizing just such a system of signals.
Today, I just wanted to take a quick look at what the prospects are for equities and see if the forex and fixed income markets are providing confirmation of that outlook or sending divergent signals. So, off to the charts.
US equities on the verge of another breakout -- 1900 next?
The chart below shows the S&P 500 (INDEXSP:.INX) e-Mini futures on a daily basis. We can see that any close above 1845.75 today will be a breakout to new highs for the minis. All of this is occurring despite persistent overbought readings on the %R indicator. Forgetting about overbought readings for a moment, the price action alone tells me that if the breakout holds into the close, we have to anticipate the rally continuing up to the 1897.77 level, which is the next projected Fibonacci stopping point for this wave higher (wave ((((v)))) & (((iii))) for those playing at home). I've had this target out there for quite a while, so the fact that it will likely be tested is not surprising. The manner in which things are playing out (seemingly endless rallying) is what has caught me a bit flat-footed-- I obviously didn't account for the external (Fed, President's Working Group, etc.) or mechanical (trend-following computer programs) influences that are clearly involved now.
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High-yield bonds are echoing the "risk on" mode of equities.
The chart below shows the S&P Barclays High Yield Bond ETF (NYSEARCA:JNK) on a daily basis going back over a year. This chart would seem to indicate a possible range of resistance coming into play at as low as 41.28 and topping out at 41.77 potentially. That is based on the idea that this is a very long-term "abc" correction to the upside and that the 100% Fibonacci projection will act as "correction resistance". The reason for the range is that we have to account for the variety of pivot points that can be used here (closes or intraday extremes, etc.). JNK is overbought -- just as equities are -- so a pause in the upside action should be anticipated at some point at the very least. Overall, it's pretty solid action for JNK in the short term, though, which is a confirmation for the bulls.
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The US Dollar Index appears to have still more room to the downside -- even in the most bullish of scenarios.
The DXY is shown below on a daily chart. Notice that I've labeled this chart with the idea being that tapering will continue and that a tightening phase for the Fed will ensue at some point. Even under this scenario, the DXY appears to have room to fall down to around 79.50 before the next up leg should start. This observation is confirmed as being fairly well-reasoned when I take a look at the chart of the euro futures (not shown here) where it appears that there's plenty of room to the upside before even the most conservative upside targets are met. The only thing keeping the DXY from collapsing lower under this bullish euro scenario is the fact that the yen appears to be set to move even lower than it already is, thereby providing the greenback a boost. So, the opposing forces of the bullish euro and the bearish yen may serve to gently guide the DXY lower to the 79.50 level. At that point, I'll have to re-evaluate things.
The falling DXY is likely to continue to be a boost to US large caps, certain international holdings, and the precious metals arena. I will, as a matter of habit, be on the lookout for any divergent behavior in any of those areas as a serious warning sign of bearish trading still to come.
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It appears that the party participants have a steady flow of beats, drugs, and whatever else they need to keep the rave going for now. It's almost certainly an unhealthy, destructive result waiting to happen, but betting on the timing of such results can be very hazardous to your financial health these days. If you're that bearish, you can willingly give up some opportunity cost, but just don't be so stubborn that you want to match wills with the raging bull.
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