Market Update 12/10/09
The talking heads at CNBC are at it again spreading rumors of a big dollar rally coming and with it a subsequent sell-off in commodities and possibly the stock market. The question is has anything technically or fundamentally changed in the last week to alter the trends that are currently in place? From a fundamental point of view it appears that nothing has changed. According to Fed Chief Ben Bernanke interest rates are going to stay low for some time and the U.S. and other governments are going to continue to print as much money as is necessary to keep the world wide economy afloat. I do not see the recent problems in Dubai having any significant impact on the market. The total amount of loans in question there is about 80 billion dollars and while by itself that is a lot of money, compared to the trillion dollar deficits that are being run up by world governments we are talking pennies, nickels and dimes.
From a technical point of view nothing has changed. The U.S. dollar is still in a downtrend and its recent rally is merely a bear market rally off the bottom of its downtrend channel while Gold and the U.S. Stock Market are still in an uptrend. The dollar managed to rally only to the mid-point of its upper channel, something it has done numerous times in the past few months, and the stochastic is approaching overbought levels.
Here is a 2 year chart of GLD that I have broken into 4 trading channels labelled 1-4. Since last November GLD has traded primarily within channel 2 and its recent break out pushed it to to the top of channel 3. It has now corrected to the bottom of channel 3 and it is approaching an uptrend line that connects the price lows from September. This coincides with the 50 day moving average that now sits at about $108. While GLD is 1/10 the price of an ounce of gold, there is about a $2. difference due to embedded fund fees so this price corresponds to approximately $1,100. for an ounce of gold. The stochastic for GLD is in oversold territory and the MACD has crossed over negatively but it is well above 0 and the moving averages are trending higher. Around these price levels looks like a good buying opportunity for GLD as the next move up should push it into the 3rd and 4th channels yielding a gold price in the $1,300.-$1,500. per ounce range.
Oil presents another interesting chart. While on initial appearance it looks like it has broken down from a bull flag pattern, if we take a closer look at it on the 3 month chart we can see that it has culminated in a descending wedge. Many times this pattern signifies the end of the correction. Since Deutsch Bank just predicted $60. a barrel oil and with the stochastic in oversold territory I will take the contrarian point of view. I believe oil is going to rally and will be trading in the $80.-$100. per barrel range sooner than anybody expects it. If oil does break below $70. per barrel then Deutsch Bank may turn out to be right after all.
The price of oil should be monitored carefully for cues as to where the stock market may be headed as it presents a catch-22 situation. When oil is less than $75. per barrel there is no financial incentive for oil companies to drill for more oil as the cost of exploration exceeds $75. per barrel. If oil is greater than $75. per barrel it is bad for the consumer and businesses that rely on it as the cost of gasoline will rise thereby increasing business costs. Since oil production and exploration were put on hold for most of 2009 due to depressed prices and the recessionary economy, we should eventually see higher oil prices due to increased worldwide demand and decreased supply.
Conclusion: The trend of the stock market, gold and commodities heading higher and the U.S. Dollar heading lower is still intact. I view this pull back in commodities as a normal correction and a buying opportunity. Traders and investors are waiting for the “right price” to jump back in and when they do expect the next leg up in the markets to be fast and furious.
