Will the Market Reversal Continue?

There's been an increasing amount of talk lately that the US stock market market is gearing up for a rally, and that we're set to see a reversal of the market trends that have dominated the last few months of trading. Let's take a look at key signs of a reversal and corresponding trading opportunities.

1. Gold is rallying and is currently at an eight week high. GLD, an ETF that tracks gold, also appears to be rallying, as it is making higher highs and is testing key resistance at 81.72. A break above this level could provide momentum traders with the confirmation they are looking for.

2. Likewise in the forex market, we see EURUSD reaching breaking past key resistance at 1.3250, and USDJPY breaking below 92.00. A break below 91.00 may be a great opportunity for USDJPY traders looking to trade the longer-term trend to 85.00. For stock market traders, the FXY ETF may be of interest in capitalizing on this.

The Bigger Picture

If the rally is sustained, I would view it as a resumption of longer-term trends in the dollar and gold (weak dollar, rising gold), but a counter-trend correction in the US stock market (whose longer term trends is bearish in my opinion). In terms of gauging the overall health of the US economy, I would look to measure any gains in the US stock market in comparison to losses against the US dollar; if the stock market is rising but the dollar is falling, it may suggest an increase in nominal, but not in real value.

Disclosure: I am long gold and USD/JPY.

Comments

[update:]

The only TREND has been down down down.

We get one dead cat bounce and all the permabull fools come piling out of the closet yelling 'bottom bottom bottom bottom.'

We ain't seen NOTHING yet in this unrelenting bear market.

2008 Dec 12 09:19 AM

[Smarty_Pants:]

The author's conclusions make sense. Follow up action after Thursday and Friday knee jerk reactions to auto bailout failure will be key.

Can the market rally late Friday and through next week to continue the dead cat bounce upward? Will volume on such a rally show strength enough to expect any bear market rally to continue?

There was something else ... hmmmm ... oh yeah:

"Bottom, bottom, bottom, bottom" ... NOT.

Duration and amount of dead cat bounce remain to be seen, but overall market is still trending downward at this point IMHO.

2008 Dec 12 09:42 AM

[GMiki1:]

But we may have higher markets with reinflation. That is, nominally higher markets--against inflation, no, but nominally--which might at least allow people to feel more optimistic. Wouldn't hurt. Lower dollar and higher gold, yes, but it doesn't mean the stock market has to trend down.

2008 Dec 12 12:15 PM

[doubleguns:]

If this was a bull market there would not be so much back and forth movement. It would simply be up. Fear is still rampant and any thing that scares will send the market down eventually when the back and forth chews up the rest of the bulls accounts. No one can guess this everytime most poeple will loose out in this type of market. A slow painfull grinding down is where we are until we hit the next big nightmareish cold blooded scream down.

After that lets see whats left there might not be nothing left to argue over. The bull, bear and hog could all be slaughtered.

2008 Dec 12 12:45 PM