A market that experiences a climatic selling frenzy can often generate hyper-sold conditions which merit for an oversold rally, but not one that is sustainable to recover from such severe technical damage. Instead what occurs is prices fall back at minimum to retest the prior low, but the decline in motion is not nearly as dramatic. Thereafter becomes a scrimmage between both buyers and sellers until a general support area can be agreed upon, and to where the next bottom can then be established.
Currently, the U.S. Dollar index does not at all reveal any convincing price action that is worthy of a true bottom. This has significance because many asset classes within the stock market respond inversely to the performance of the greenback currency. Essentially by knowing the dollar's next move can better prepare your analysis in other markets.
Take for instance the Daily chart I have below.
I expect this current bounce within a panicky decline to fulfill another low here within the next few weeks. Following what should culminate into a basing period, I anticipate a counter trend rally to emerge and set the stage for a corrective move in both stocks and commodities.
I don't' think I am stating anymore than the obvious about their being a major top in our U.S. Bond Market. The Federal Reserve clearly surprised many investors with the purchase of mortgage back securities, and not U.S. treasuries as was done with QE1 and QE2. Consequently, this holds very little incentive for bond holders to continue purchasing U.S. Debt and will likely look elsewhere to reposition at least until now through the election.
Prices have materialized into a classic Head and Shoulders technical formation, but more importantly, generated a decisive downward break of the long term cycle trend-line that for many months held as previous points of major support. The occurrence of these two specific bearish events structurally classifies our U.S. Bond Market as being in a confirmed downtrend.
Above all else, you should know that for any asset class- be it bonds, stocks, or commodities; all are driven by only two specific fundamental principles. How much liquidity is available, and how much of that liquidity is willing to be invested.
Emerging on the scene is a three headed monster that will eliminate all fears of liquidity ever running dry between now and year end. It being- the flight of capital from Europe into the U.S. Markets, the intended inflationary tactics instrumented by the Federal Reserve, and the outflow of money from U.S. Treasuries into undervalued sectors of the stock market.
I think at this point we can safely say that all bearish bets are off the table. And nearly every broad market average index is on the verge of ascending to new all time highs, re-confirming the very expectation I outlined in post titled, "Are we to Blame Nixon."
At the moment, however, the Stock market is likely looking at a consolidation period very similar to month of August before it resumes its advance higher.
Since the Federal Reserve called to a halt a forthcoming grueling market decline by announcing its new supportive stance on aggressive monetary policy, I think it's time that my longstanding target of 1565, give or take 20 points on the S&P 500 will come into fruition in the months ahead.
But when I say 1565, we will be so close to the previous 2007 bull market highs; and there will be every political incentive to send prices to new all time highs for the purpose of creating the illusion of both "the richer effect" and a true economic recovery.