Over the last few weeks I’ve been discussing the possibility of several significant reversals between correlations in the currency, stock, and commodities markets. I still see stocks perhaps peaking or at the very least, losing momentum until QE II runs out, the dollar index reversing on the Euro, and more strength in commodities as PIIGS nations are in need of more assistance from the ECB and as middle eastern nations revolt causing oil prices to spike.
First of, the S&P SPDR has stalled out on the unrest in Libya which has forced a lot of money out of stocks and into other assets.
We’re starting to see the divergence in the MACD and RSI as the volume increases substantially. The VIX recently increased 37% in under 3 weeks, which has not been done since June. The 50 Day MA remains intact but the market isn’t showing any buy signals yet.
The top in stocks is not at all coincidental with the price action in the currency and commodities markets. FXE is at the top of a wedge that could play out to be a 5 point reversal pattern. Note the RSI and MACD divergences as well as the decrease in volume as the price continued to run higher. Today’s activity formed a bearishly engulfed the previous candle. The previous candle also happened to be a doji, which is often the signal of a pivot point. The market still likes the euro, but it won’t be long before the PIIGS are making headlines and the strength in oil puts pressure on the American consumer which is bullish for the dollar.
Trading inverse to the euro, the dollar bullishly engulfed friday’s candle and is showing divergences on the RSI and MACD. I still think UUP is favorable below $22 and the options market has good bets if you know where to find the high volume calls.
I’ve previously stated that gold will return to the spotlight when equities peak. With strong support at $1380-$1400 and the 20, 26, and 50 Day MA’s trending higher, I see gold’s performance as a leading indicator to what lies ahead for the global markets. Gold will continue to look attractive here as uncertainty builds in the equity markets and as the Fed continues to hint at QE III.
Another commodity that has been a leading indicator of inflation is silver. Following a brief, but steep correction, it has again today made a new 31 year high and is one of the loosest cannons out of any asset. Based the volume increase, the RSI divergence, and the close above the upper bollinger band line, I’ve come to the conclusion that we’ll likely have a reversal tomorrow. It appears that the most likely scenario for tomorrow is a key reversal or a bearish engulfing candlestick. I think that this will initiate a pullback to the 20 Day MA which will be followed by continued strength in this market. In any case, I don’t see it going much lower than $33, and I’d also be a buyer as soon as it shows me a bottom.