Over the last six months, this rally has been funded first by short covering and bail out funds supplied to banks. (invested in call options they bought from scared pension funds and retirees). The problem is now the FDIC, deficit and pressure on the Fed is making fiat liquidity scarce. The Fed knows it can not take the risks it is used to being able to take. As the pressure on the fed, and against their 90 year campaign to short the dollar, increases...it will be visible as the shortage of available cash dollars as increasing prices in the chart below. The fact is, the system has come to a grinding halt. The Fed can't print the way they were used to, they can not lie about their balance sheet investments like that have done because Ron Paul, a large amount of americans and 280 congressmen are breathing down their throats.
I am looking for a dollar break over the red line on the chart below to signal the next round of deflation is in full throttle. It certainly is galloping along, but could hide for a little longer if the powers that be or markets wanted to look past it. Over that red line around 78.39...irrevocably declares a trend change in the dollar and likely the beginning of the end of Fed's campaign to destroy it.
All action in the market will be guided by the dollar in my opinion. The upper trendline is my immediate target and could be met tomorrow or monday if the market wants to do it. Given the action in the VIX and the dollar, I would look for a pullback consolidation in the two and then a resumption of the upward move. If the dollar can break cleanly through that upper trend line without pullback or consolidation...then the severity of the situation in the markets will likely intensify very quickly. I think that this is a significant possibility. But, more likely I would look for a good size rally for a larger corrective bounce after the dollar reaches resistance.
