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Thursday, 14 October 2010

Mass Bear Capitulation

We crossed some big lines in the sand yesterday and the equity bear camp across the blogosphere is capitulating en masse. They're right to capitulate as this is clearly a big impulsive wave up, and waves like that tend to come in groups. Until something serious changes, then the bulls are in charge and that should be respected.

It has been my view for a while now that we are in a new bubble (of three big bubbles in recent years), fuelled by government debt and money printing, and that this bubble would be likely to continue until government profligacy provokes a big bond market crisis.  That's still my view, and that crisis looks to be at least a year in the future, and perhaps as many as three. Until that happens there's not much mileage shorting this market in my opinion other than for short term reversals, and the big summer reversal looks over now.

The Nasdaq broke both the intraday and closing April highs yesterday:

SPX is still in the main rising channel from the last low, and the target for the next hit of the upper trendline of the rising channel is in the 1210 - 1220 area. Pug's primary scenario now has this wave up finishing in the 1215 area and that might well be right. Regardless of that no end for the wave will be confirmed until that SPX rising channel is broken:

However I think it would be a mistake to think that we're just going to shoot to the moon here while USD dives towards zero. On USD particularly there is every reason to think that we will see at least a strong bounce and very possibly a major reversal in the near future. We're coming up to the key support level on the USD chart, and sentiment looks very promising. Dollar bulls were down to 6% at the big low in March 2008, and 3% at the higher low in November 2009. They're at 3% again now and the rising support trendline from those two lows is at 75.8, not far below the 76.6 level at the time of writing. That support trendline could break of course, but the odds look good for a reversal there:

There are other reasons to think that USD may bounce there. AUDUSD has not yet reached parity with USD, unlike CADUSD which did that yesterday, but that's likely to happen soon, and I have a major resistance level in the 101.2 to 101.5 area:

I've posted the copper chart quite a few times as well pointing out the overhead resistance in the 392 to 394 area. Copper's been as high as 386.75 this morning so we're close to that too:

Can USD rise while equities are also rising? Yes, and that's exactly what we saw for five months between the last USD low in November 2009 and the equities high in April 2010. The equities low this summer was also made a month after USD topped and reversed, so there's no reason to think that can't happen again.

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