Monday, October 26, 2009

Market Observations - Targets

First, lets talk about the dollar...down trend line at 76.4. Seems obvious that we will complete 5 waves up to test this resistance level. The question is what we get when we reach there. A Breakout? Reversal? Consolidation?

The pattern in the dollar does not leave room for a new low. If the dollar were to break to a new low, it would likely be ushering a different pattern than an ending diagonal...which would likely be a new 5 wave move down, the inflation trade would likely play out. So, it does not seem very likely for a structure like this to be followed be a new low.

Given the intensity of the rise, which was stronger than I was expecting, we are now at nearing formidable resistance with an overly confident set of bears in the market and the divergence in the Euro market, all seem to indicate to me that the amount of bears that will be trapped here could be sizable. If that is the case, a break of the 76.4 area will not give much time to get in. I may not give a retest of consequence and thus the SP500 may find itself in the 1020's lickity split. Incidentally, my target for the SP is 1026 for this initial move down...but we should not count on a big bounce. Just like the rally did not let you in, this bear may be even less understanding.

In any case, it seems like a consolidation is in order for the dollar once it hits 76.40 and that will give us a change to see if the market can muster one last bounce off trend line support. I am not optimistic that the market can stage a rally here given the unexpectedly strong reaction of the dollar here.

thanks to matt fraily,
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