stevedakota's  Instablog

Technical Support Levels Broken & US Dollar Rally

Since my entry on this blog dated October 20^th, one that talks about the potential of us testing 7500 on the DOW sometime in the next 12-24 months I’ve been keeping a close eye on the technical underpinnings to see just when this might happen.  In that post I talked about the risk/reward scenario from the 11,100 area and that we might have one more push to 11,400-11,700 before the meltdown begins.

Well since that blow off top we now traded down and have recently broke the technical uptrends that momentum players love.  Not only has the major indexes lost its upward momo but also the US Dollar has bottomed (see my post of the US Dollar Bottom – Island Reversal).

The dollar is now poised for a hard rally that will cause the equity market to fall – and based upon what I’m seeing this is going to be a very swift downward move as the dollar will move sharply higher – some might use the word “Violent” because the moves we will now see will be “Violent”.  Volatility will be back in the market during this move and the traders will be in and out of positions before days end to ensure they have “Cash In Hand”.  We will once again here the term “Throw the Baby Out With the Bath Water” on CNBC by all the talking heads.

Cash is now king again IMO and we are going to spend the next 2 years unwinding this latest fed induced credit bubble.  During this time we will finally see a bottom in housing – at least another 20% decline and the jobs market will finally gain about 150k each month – the 150k a month number is the new jobs we need to add each month just to keep us at 9.5% unemployment.

As for how far we can drop? – Well that all depends over what time period.  I am pretty certain on this first leg down we are looking at a 10% drop from this level with the back drop of trading down a lot further at any point in the next 12-16 months.  Just how low? Well about 30% before I would feel safe about the risk/reward scenario being on the long side!

www.stevedakota.com/2010/11/cash-is-king.../

With my overall theme in the market as being to the down side from our recent levels and Cisco making huge news today with bad numbers causing its stock to have a huge drop ($23 billion in market share loss so far) its time to look at where Apple can go from here.

In late 2008 and early 2009 Apple’s stock price traded below $80 a share and I remember saying at the time that if there was one stock to buy that you wanted to be long it was apple!  My two biggest reasons was for one – Apple had $24 dollars a share in cash and with a stock price at a little more than 3 times its cash in the bank it was like buying apple for $55 dollars in my mind.  The second reason was the boom for apple products was still booming – I myself turned to all mac based products and after a few months of getting used to I came away loving everything I bought!

This is not a fundamental call because Apple is still a great company with plenty of growth ahead of it.  It’s just a call about the underlying technical’s that call for a correction in its stock price.  After the bottom of $79 a share it has made an unbelievable run to the $320 area and over the past few weeks has been consolidating at this level.  The rate of acceleration has slowed and the stock price is ready to break some of its recent uptrend lines.

If the $320 area is the top – which in the short term I believe it is then there is plenty of downside to come on a correction.  How far could the stock pull back?  Well- its difficult to put an exact number on it – but the area I think it will trade down to is between $200 and $250 a share or somewhere between a 20-35% drop.

Once again- I love Apple as a company but in the short term I think this correction is coming!

www.stevedakota.com/2010/11/time-for-app.../

One of the strongest technical trading indicators that I have seen over the past 13 years of my eye on the markets is what we call an Island Reversal- this is when a stock or index makes a new high or low on either a gap up for new high or gap down for new low on one day then closes trading that day never closing the gap. Then on the following trading day it gaps in the other direction leaving behind an area gap of no trading thus making the previous days trading look like an island.

Well its not 100% confirmed yet that this morning an island reversal is in – we need to wait for how the us dollar closes trading and what type of follow through happens next week but all the early signs are there.  More importantly if this island reversal is confirmed then we should see quite a strong rally in the dollar causing trouble for us equities.

Here is a screen shot of the UUP (US dollar index bullish fund)- see the island of trading yesterday and the rally this morning