smb weekly mar 28

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The Stock Market BarometerStock MarketBarometer

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Milan, Italy

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Web site: www.thestockmarket barometer.com

WEEKLY REPORT

(03-28-2010)

Blowing in the Wind

Youll notice that Bush never spoke when Cheney was drinking water;

check it out!

Robin Williams

We are seeing some interesting developments in the markets so I want to

jump right into it and save all the social and political commentary for the

end. I would first like to focus on the US dollar since it is the hot topic ofconversation in the media, and its price movement is subject to a lot of

misinterpretation. The general line of thinking espouses a new bull market

for the greenback given the fact that the US economy is on the mend. As

you know by now I dont believe the economy has bottomed and I

certainly dont buy into the idea of a new bull market for the greenback.

Yes, we are experiencing a reaction and its one of the largest to date since

the dollar topped in 2001, but that doesnt mean its a new bull market.

Whenever you want to see the big picture in a market, it helps to get awayfrom the here and now, and the best way to do that is with historical
mailto:[email protected]:[email protected]:[email protected]


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weekly or monthly charts. Here I have posted a twenty-year weekly chart

and I would like you to take a look at it:

The obvious thing that sticks out is the massive head-and-shoulders

formation with the neckline coming in at 80.35. This is a formation that

took the better part of twenty years to complete and included a bull market

top in 2001. Since the top was put in we have seen a sustained move down

that produced two lower highs (short horizontal blue lines) mixed with

reactions of 10% or more. Today we are in the midst of a third reactionand I am convinced that it will also produce another lower high. Recently


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the US Dollar Index moved back above the neckline but that happened

with the previous reaction as well so you shouldnt read too much into it.

A week ago the US Dollar Index also closed above strong resistance at

81.32 and closed out the week at 81.60. The dollar is not yet overbought

on any chart (daily, weekly, or monthly), but it is close. I suspect thatsometime within the next week or two the dollar will test strong resistance

at 83.35, it will become extremely overbought as it does so, and well see a

top in that area. With that said there is still good resistance at 82.41 to

overcome and it could also produce a top. Thursdays intraday high at

82.24 came very close to testing the latter support level and I would look

for another test this coming week.

SUPPORT RESISTANCE

SPOT US DOLLAR 81.32 82.41

80.16 83.35

77.92 84.89

77.02 87.25

Why is the dollar so strong? I normally dont concern myself with the

why behind a movement, but this is an interesting case. The worldeconomy has been deflating for almost three years and, as a result central

banks around the world have been printing obscene amount of fiat

currencies in an effort to reinflate the economy. The US Federal Reserve is

the leader of the pack when it comes to this printing mania. Of course this

alone will not produce a rally. What produces a rally is the fact that most

debt around the world is denominated in US dollars and deflation reduces

income, therefore raising the cost of maintaining that debt in real terms.

Thats where the demand for dollars has been coming from and it hasoffset the significant decline in the foreign appetite for US debt. Of course

the world goes about making adjustments, and that is what is happening

now. Theyll cut costs, reduce debt, cut back on the consumption of raw

materials, and when they are done the dollar will roll over and fall. My

guess is that we are almost done with this adjustment process.

Although the dollar has been on the rise and currencies like the Euro has

been taken out to the woodshed, I would like to draw your attention to aninteresting phenomenon:


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The Swiss Franc has given up very little ground and both the primary trend

as well as the secondary trend is headed higher. The reason for this is that

in the final analysis the Swiss will always protect their principal business,

money! The Swiss have been in the money business for four hundred years

and will remain in the money business for the foreseeable future. That

means they most maintain a strong currency in spite of all the rhetoric to

the contrary. Problems within the EU with Greece, Portugal, Ireland, and

Spain, as well as the staggering debt load in the US, will continue to drive

investors to the Franc for a long time. Thats why Ive always

recommended it to our clients.


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Perhaps the most interesting market, and certainly the most misunderstood

market is the gold market. The misunderstanding is due to a blend of

ignorance and emotion, and it causes investors to buy high and sell low.

This type of behavior has always dominated the gold market because it isthe only real store of value that exists in the world today. Below I have

posted a six-year weekly chart and I would like you to take a look at it:

Aside from the obvious that we are in a bull market, there is one very

important feature to grasp, and that is the fact that gold is undergoing a

period of consolidation right now. We have seen this before, I have

highlighted three such periods on this particular chart, and they all end the


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same way, with an upside breakout and the gold price moving

considerably higher.

Most analysts are inexperienced when it comes to gold and they miss this

aspect of the yellow metals conduct. Actually since the bull market beganback in 2001 we have seen five such periods of consolidation, and they

should be appreciated for what they are, a signal of higher prices to come.

The current consolidation is occurring within a range that stretches from

1,048.90 on up to 1,148.70 and is slowly shrinking, another feature that

occurred in all of the previous consolidations. Unfortunately, most

investors misinterpret this behavior as a sign of weakness, and having

bought at higher prices, they bail out just when they should have been buy-

SUPPORT RESISTANCE

SPOT GOLD 1,090.0 1,148.7

1,077.6 1,158.2

1,048.9 1,219.2

999.4 1,298.1

ing. Thats the inherent sadistic beauty of a gold bull market, you knowits a bull market, you know the price is going higher, and yet you lose

money! In the gold pits human emotions play on investors like no other

market on earth. Everybodys in for the long run and yet everybody is

upside down.

On Friday the spot price for the yellow metal closed at 1,107.10 and that

was a gain of thirty cents for the week. Yet if my e-mails are any

indication, you would have thought that the gold price had fallen throughthe floor and gold bugs were being force fed to hungry lions. I warned

many of you months ago that volatility would increase and that is exactly

what we are seeing. As for the immediate future that has so many investors

captivated, I wouldnt be the least bit surprised to see the yellow metal fall

down to the 1,048.90 area one more time before turning back up for good

and that is reflected in the following Point & Figure chart:


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You can see a bearish price target of 1,040.00 and that ties in nicely to the

support I mentioned earlier. What happens if support at 1,048.90 fails tohold? Then we more than likely fall down to support at 925.00 which is

the bottom band of the ascending primary trend, but if history repeats itself

as it has on four previous occasions, gold will hold and head much higher.

I will even go so far as to say that well see it start the move higher in

April.

Now lets turn our attention to the bond market as this week investors

decided that US debt is not such a good deal. There were two separateauctions this week that went poorly to say the least and that drove interest

rates to the highest level since December:


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Like so many other markets, we can see the formation of a large head-and-

shoulders pattern over a long period of time. Over the last two weeks the

bond market sent an ominous signal as it broke down below the neckline

and it hasnt looked back. Most people fail to understand the consequences

of such a move as higher rates mean that investors see increased risk in

holding US debt and it increases the cost of doing business/servicing debt.

This comes at a time when the economy teeters on the edge of a

deflationary abyss and higher rates are just the ticket to push it over theedge. For people who are indebted, the rising dollar together with the

rising interest rate is a double whammy that most will not recover from.


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That just leaves us with stocks. The Dow continues in a liquidity drenched

world of its own and that is the primary reason behind the sharp grinding

move higher shown in the following chart:

The Dow is climbing at a greater than 45 angle and that is always

dangerous as the slightest correction can drive it below the bottom band of

the ascending trend line. You can see that in spite of a small gain on

Friday, the Dow barely closed above the line. You can also see that theDow is extremely overbought and yet the RSI and MACD are still pointed


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higher. Only the histogram is declining. This last week we saw the Dow

climb above good resistance at 10,817 and it really hasnt faltered although

it did fail to hold on to good gains from early morning rallies on both

Thursday and Friday. The question as to how high the Dow can go is a

good one as there is no further Fibonacci resistance until 11,245, and this

corresponds nicely with the 11,250 price target from the preceding Point &

Figure chart.


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Personally I think the Dow is to be avoided at all costs. For those of you

who bought the Dow on the major buy signal two weeks ago, I would

think seriously about taking profits at the next new intraday high. With the

Dow now sporting a price/earnings ratio of 20, and an average yield of

2.6%, its about as expensive as its been in a long time. Furthermorevolume has not improved telling me that the large investors are still sitting

on the sidelines. On the other hand there is no technical justification to sell

the market short so all you can do is sit on the sidelines, watch, and wait.

We are on the verge of another earnings season and so far profits are the

result of cost cutting rather than increased sales. Ive been around long

enough to know that if you cut too deeply into your cost structure sales

will suffer, and I believe thats where were at right now. I suspect profits

will disappoint and that has yet to be priced in. As usual, patience isrequired.

In conclusion we continue to be force fed the notion that things are getting

better in the United States. Unfortunately, unemployment and housing do

not reflect the improvement and since most Americans dont have much

else, theyre mired in the quicksand of debt and sinking deeper with each

passing month. New home sales hit an all-time low in February while

inventory increased to a 9.2 month supply. This is not a pattern that is con-


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sistent with the idea of an expanding economy. Meanwhile real M-3

continues to contract and the signs of a further slowdown are everywhere

if one only cares to look.

This week Obamas health care program was passed by Congress and willserve to exacerbate the problems, and the debt in the US. Obliging millions

of Americans to accept a program they cant afford and wont help them

will only create social ill will. In the end the Obama plan will widen the

deficit by trillions of dollars and will cost lives as an inefficient

government loses patients in bureaucratic red tape. Right now everybody

is being lulled to sleep by the tag team of a strong dollar and a strong Dow,

but that is just so much sand in the eyes of the bear. Investors will find out

the hard way that there it is not any different this time around. There is nonew paradigm and history will repeat itself! As usual the average man on

the street will learn this the hard way.

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March 28, 2010
mailto:[email protected]:[email protected]:[email protected]

smb weekly mar 28

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