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Message of the Markets: More Upside for Bulls Before Rally Fizzles Out


For now, use any continued rally up to resistance levels to lighten up on long positions and prepare short positions / hedges for what may be more downside to come.


Overall, we're seeing some technical improvements, which at the very least offers the bulls some more upside before the rally really peters out. At best, this is actually a new primary wave higher in risk assets – but I'm not in the "believers" camp there yet. For now, my call is to use any continued rally up to resistance levels to lighten up on long positions and prepare short positions / hedges for what may be more downside to come.

Message of the Markets

The DXY has broken its short-term uptrend – which has given risk assets a boost:

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  • The US dollar broke the very short-term uptrend line late last week and has continued lower (giving risk assets a boost).
  • This move, however, seems to me to be merely a downside correction. I will be proven wrong if the 100% Fibonacci price projection line at $77.05 is broken on the downside.
The euro/US dollar cross's rally has been a big factor in the DXY's weakness. Is the move over, though?

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  • The euro / US dollar cross is the driving currency cross for the US Dollar Index. The EURUSD has rallied sharply on the hopes / rumors of solutions coming from Europe.
  • The rally in the EURUSD should be merely a wave iv correction higher. The upside for this wave could be right at the 100% Fibonacci price projection line at 1.36654.
  • A break and close above that level opens the door for wave iv upside all the way up to 1.39687.
The S&P 500 Index has a bit more room to the upside before hitting resistance:

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  • The S&P appears to be on a mission to get to 1221.51 or higher. The way this move off the recent lows has occurred makes a move up to that level almost a certainty.
  • A break and close above the 1221.51 level would likely mean a move up to around the 1265 level – which is the very max upside if this move is only a corrective move higher (which is my call currently).

The yield on the 10-year T-note has bounced and has more room to the upside:

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  • One positive confirmation for risk assets is coming from the bond markets. The yield on the 10-year US T-Note is trading above the 100% Fibonacci price projection line (for what might have been an abc correction).
  • A close above that level (2.086%) would mean that there's more short-term upside in rates (downside in prices) ahead of us. In today's market environment, higher rates only happen when we're seeing a rally in risk assets – so those of you who are risk bulls should really hope to see a continuation of the upside here.
Gold futures having a hard time getting through its first level of resistance:

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  • Gold futures are almost certainly in the midst of a wave iv correction after the powerful wave iii lower that occurred in September.
  • The question is whether this will be a "flat" correction – in which case the short-term top may have already been put in over the last day or so – or a "zigzag" correction – in which case more upside to 1729 or so is still ahead of us.
  • I believe the answer to this question lies in the fate of the euro / US dollar cross (which was highlighted earlier in this report). If the EURUSD fails to break above its short-term resistance at its Fibonacci line, not only will it start to move lower again, but gold will likely go lower with it.

Crude oil has rallied with stocks… running into downtrend … should go higher:

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  • Crude oil are also in a fourth wave correction (higher). Like gold, crude oil can either stall out here (at crude's downtrend line) or it can rally a bit further (with stocks) and challenge recent highs at $90.74.
  • The very maximum upside crude oil should experience would be all the way up at the bottom of wave 1 at $96.54. Once again, much of the action here will be determined by what happens in the EURUSD cross.
As I mentioned at the outset, there may be some more upside ahead in the very short-term, but let's not (yet) get carried away on the long-side for risk assets. Enjoy the upside while it lasts!

Twitter: @tttechnalytics

No positions in stocks mentioned.

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