What’s Next for the Dollar, Gold, S&P 500?

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The equities market reversed to the upside Wednesday posting a light-volume, broad-based rally. Remember light volume tends to have a neutral to upward bias on stocks, but it was mainly the sharp drop in the U.S. dollar which spurred stocks and commodities higher.

The bounce was not much of a surprise for several reasons:

1. The overall trend is up; one-day sell-offs are generally profit-taking.

2. Panic selling on the NYSE tipped us off that the market was oversold

3. I don’t think the government will let the market fall before the November election

4. Intermediate cycle is turning up this week; three weeks of upward momentum

The dollar put in a big bounce this week filling its gap window. Remember most gaps get filled with virtually every investment vehicle, so when you see them remember this chart.

U.S. Dollar Index 4-Hour Chart

The S&P 500 has been riding the key moving average up, and Tuesday’s sell-off tagged the 14-day moving average along with extreme market internal readings, telling intraday traders that a bounce is about to take place.

SPY ETF Daily Chart

You can see that gold has done much the same. A sharp profit/stop running sell-off, which took the price back down to support. We took a long position to catch this bounce and hopefully a larger move going forward.

Gold Futures Daily Chart

Market Sentiment Readings

Tuesday’s pullback was a great reminder of just how overextended the equities market was. These heavy-volume sell-offs are typical in a bull market. Without regular pauses in price, traders tend to place trailing stops moving them up each day.

With traders chasing stocks higher, bidding them up instead of waiting for a pullback, we get a very large number to stop orders following the price up each day. Then it’s only a matter of time before a key short-term support level is broken at which point the flood gates open and everyone’s stops turn to market orders flooding the stock exchanges with sell orders causing a rapid decline and panic selling. This is exactly what happened on Tuesday, which I show in the chart below.

Understanding how to read market internals provides great insight for short-term traders looking to make quick, high probability trades every week. Market internals are just part of the equation, but very powerful on their own with proper money/position management. Both of these intraday extremes were bought on Tuesday, and we quickly booked profits and moved our stops up in order to protect our capital as the market surged higher.

Mid-Week Market Trend Analysis

In short, the U.S. dollar is still in a overall downtrend. I think the feds will continue to hold the market up into the election. It works well for them: They print money, which devalues the dollar, and in return boosts stocks and commodities, plus they get trillions of dollars to spend. I’m sure it’s like kids in a candy store over there.

While everyone is trying to pick a top in this overextended market, I think it is crucial to stick with the overall trend and to not fight the Fed. Use the key moving averages on the daily chart as shown in the charts above, continue to buy on dips until the market closes below the 20-day moving average, at which point you should abandon ship.

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Article printed from InvestorPlace Media, https://investorplace.com/2010/10/whats-next-for-the-dollar-gold-sp-500/.

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