Dollar surprises while stocks stage strong rally

It was another stellar week for the markets. At this time a week ago we were waiting on the Chinese to see how they would respond to the move off the bottom. They answered in the affirmative. Consequently just about everything that could be higher was higher and what might have gone lower did.

Probably the biggest surprise was the US Dollar which came down to institutional support in a classic unwind off the high. During the course of the week, the Dollar actually sold off through a key Gann square of 9 reading, one which is very hard to pierce. But Copper was higher which was largely due to the move on the SSE. So the risk trade was on. If I had to pour cold water on anything, it was the fact that tech was approaching the highs of late September and had they not pushed higher, it appeared we could’ve topped out on what Elliotticians call an ABC flat higher. An overall B wave rally from the August low period to now where the C wave down is straight in front of us. But the NQ also violated a key Gann reading and due to Friday’s strong action, the odds of a completed B wave bear rally have dropped dramatically. We still can’t rule it out but the later get into October without disaster, the greater the chances it won’t happen this year.

From a psychological point of view, there are big differences from 2008 to now. In 2008, the Lehman crisis caught us largely by surprise which touched off the worst financial crisis since the Great Depression. In 2011, we expected Europe to have its own Lehman moment. The point to remember and take out of all this is the 2008 experience has scarred all of us, probably for the rest of our lives. It’s scarred us in a way that 1929 impacted that generation. So we naturally would expect to see the next disaster. But it appears there are enough adults in the room with the capability of kicking the can down the road until next time. So if you can understand that, you can understand why risk is back on and markets have been in rally mode. By the looks of the NQ which is already back near the top, odds have grown exponentially we have a low in place. Has it 100% confirmed? Not yet, as I think we need to see the next pullback to confirm it. It’s not in the rally that confirms the turn; it’s the pullback where sellers fail to show up.

There are certainly reasons to think this week will not be as easy as the prior 2 weeks. Personally, I don’t think last week was all that easy simply because the logical place where you’d expect the smart money sellers to come in didn’t materialize. The Dollar never bounced and the bond market stayed down. In the case of the Dollar and bond market each fell further than anticipated. So have we reached the point of emotional low which will turn back up or permanent technical breakdown for these 2 charts? I suppose we’ll find out on Monday. But we’ve reached a point again where one would expect Greenback and bonds to make another bounce attempt. Any success in either means bulls in the equity market will start to take profits.

All of which brings us to the BKX. As we know the action there has been horrible for a long time. Back in September there was a possibility of a bottom before it collapsed again. However this time the action is riding a channel line, which maintained gives the banks great potential for upside. As you know we don’t need banks to lead up but as long as they are neutral to hanging tough it allows the rest of the market to keep going.

In the near term, the parabolic nature of the move is a real concern because any market that goes straight up in an action reaction phase can come straight down and it doesn’t necessarily have to take out the bottom to cause technical damage again. But on the other side of the coin, when you look at how far the markets have come in the past 2 weeks, there is an element of disbelief about the whole thing. It’s that disbelief as opposed to euphoria even as we are near the highs that should ultimately propel prices even higher. At the end of the day, it really doesn’t matter where the markets are; it’s the reaction to their level. Go look at your smart phones and either the CNBC or CNN app and the headlines you are likely to see are about one worry or another. In other words, the NQ and NDX are close to the top set in July and sentiment isn’t anywhere close to the kind of euphoria needed to top it out. If you remember one of the prior tops this year came in on the fantastic news of the capture and elimination of Osama Bin Laden.

That news was greeted by euphoria at Times Square as well as Pennsylvania Avenue. As I think about all of the events that could cause that type of euphoria this week I can’t really think of anything. If there is anything, it could be that they finally close the deal to kick the can down the road in Europe. But I don’t think that is really possible until early November. Unless markets just turn remarkably happy in the next few days I don’t think a real top is probable.

Next page: What could send markets lower?

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