Wednesday, June 3, 2009

Market at a Key Juncture

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Dow finally pierced and closed above its 200-day moving average yesterday, the last of the major indices to do so. This could be a possible end to the rally that began in early March, but we don't know for sure yet. The trade-weighted U.S. dollar hit major long-term support overnight and has so far managed to bounce off of it. Gold reached as high as 990, once again bumping up against its major resistance at a 1000. Oil has traded well above 68 and is close to important resistance at 70. At least a short term reversal of trends is possible for all of these markets. It will take awhile though to determine if this will turn into something bigger.

In many ways the dollar is key to all the other markets. The trade-weighted dollar fell as low as 78.40 last night and made a double bottom on the short term charts. Major support is at 78.33, which was the low point of a large reverse head and shoulder bottom pattern made between 1991 and 1993. This support was broken in 2007 and the dollar then fell to around the 72 area. The dollar traded as low as 79 at the end of last year before recovering. What saved the dollar from the precipice last night was 'unnamed sources' telling Reuters that "a downgrade in the U.S. sovereign credit rating would not discourage Asian central banks from buying U.S. treasuries." Now I wonder who could have planted that story at such a convenient time? You should also be wondering are these Asian central bankers really that dumb or should they be suing Reuters for libel?

The short term key to whether or not stocks can hold their gains and go higher is whether or not the Nasdaq can hold above its 200-day moving average. Nasdaq was the first to break through this key resistance and has been leading the market up since the bottom. The Dow is the market laggard, although its position might improve in a few days when major losers GM and Citigroup are removed from the index and replaced by Cisco and Travelers. The Nasdaq 200 line is currently at 1684 and still falling. Nasdaq is holding above 1800 this morning.

At this point, whether or not gold can finally make the break above the magic 1000 level will be determined by how the dollar holds up. If the dollar breaks below 78, gold will be breaking above a 1000 and will rally until the dollar fall is broken. Expect major government manipulation behind the scenes to try to prevent this scenario. If they fail here, they will try for a reversal lower down. A weak dollar will also boost oil to higher levels, although a good hurricane could do the same.

NEXT: Dollar Sage Continues; Commodities Take a Hit

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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