SUMMARY: CAD could fall faster than the USD; Dow components gradually going the way of EK, MRK, or SBC, as post earnings sell off may have begun; the weak Yen has done nothing for Japanese capital markets; US dollar run and odd rumors about additional gold supply derail Gold/CRB this week; the more cheap gold for sale today, the more bullish for tomorrow…

After a solid three-day run dollar bulls headed south for the weekend against most currencies except for the yen and gold, which were down 0.17%/0.46% in the forward markets, respectively. The most favorable gains went to the euro and Swiss Franc, Friday.

The yen went to a fresh marginal low in its post Sept downtrend, but closed near its highs for the day.

The European currencies turned up without making a new low in the post September period, but are still in their mild downtrends.

The Canadian dollar completed an outside day (it made a fresh low and closed above its Thursday high) on the short term chart, but the close was still below the 6 week neckline of a bearish head and shoulders pattern, and the objective of the pattern has yet to be met (0.6080). The chart to the right is inaccurate; CAD gapped to its fresh lows on Thursday.

It could be fair to expect the Loonie to test resistance just to make sure there really is a neckline before turning down sharply. Or maybe it isn't. It would sure make me nervous bottom fishing this currency while it just hangs there at fresh lows, however.

The CAD has been under performing even against the Australian dollar over the past 6 months. There is plenty of relative weakness in this market, and after such a long downtrend (30+years) it is susceptible to a panic of some kind.

I would certainly like to see how the Canadian dollar reacts to an interest rate hike by the Bank of Canada before bottom fishing it myself. And I'm not so sure how it might respond to a broad USD sell off. Let's put it this way: it is known to sell off harder when that occurs. During the weakness in the US dollar index over the early nineties, the Loonie was even weaker. Then 1997 was a strong year for the US dollar, but the CAD went off to new lows. 1998 was a weak year for the US dollar, and the Loonie accelerated into a mini panic.

The currency has even under performed the commodity complex over the past decade. That said a selling panic could be just the remedy to turn this currency around (at least an intermediate reversal), particularly if we are at or near the crest of a commodity bull market and the peak of a US dollar run. The reason is that few things create confidence in support like panics do, if they look right on the charts. Within Canada, I'm hearing bozos talk on the radio that maybe the BOC rate cut this week wasn't enough. Sure, send that message to the Bank of Canada. Lower Canadian interest rates to zero, so that we can have that panic on account of how many people would not seem to understand why the CAD continued to sink.

If people think that lower interest rates produce a strong economy then what are Canadians going to think when the currency slides with each successive rate reduction? I think they'd panic; as sure as the sun rises each morning.

The US Treasury complex was up on Friday's share decline on Wall Street, after an initial midweek retracement (in bonds). The long bond also saw an outside day ST reversal to the upside.

It was interesting to note that when bond prices fell in the early morning session, the US dollar was up, but sometime after the Treasury complex turned up, the dollar turned down. This gives us some confidence that falling stock prices and lower yields are bearish for the dollar anyway. But should the dollar turn down as we think then the question is what will bonds do, and how will the currency react to potential changes there?

I suppose that the answer may lie in the commodity complex. Should the decline in stock prices engender new lows in the CRB then perhaps the dollar & bond will find some firm ground.

We'll just have to wait and see.

US stock markets closed near session lows yesterday, but not before pumping bullish smoke into European trade, leaving European bourses vulnerable to a sell off Monday morning.

The Nikkei was up almost 2%, but its components have been battered all of last year, and they have only stopped being battered since late September. The weak yen has done nothing for these markets.

Pundits could argue that it has stabilized the decline in the Nikkei, but considering that the index has fallen by more than 50% from its 2000 high, perhaps anything could stabilize it, even a butterfly.

In fact, it is probably the combination of falling share values, interest rates, and bond yields that accounts for the weak yen last year.

On Wall Street, the breadth and activity was decidedly bearish, but bulls were able to hang on to support, barely. A break through Friday's lows this week could be the signal we're looking for, in order to time the next bear leg.

We can count about eight Dow components that have reversed their post September uptrend now, and could be headed the way of Eastman Kodak, SBC, or Merck. Despite its strong bounce on Friday (+2%), 3M is one of them. Coca Cola is another, as well as Honeywell, UTX, Dupont, Alcoa, Paper, and IBM. An additional three components have been either in a downtrend or trading sideways since September.

Microsoft and many others appear to be headed that way also, but have yet to turn over control of the trend to the bears.

What we're reporting here, I'm sure can be seen in the advance/decline line also.

Commodities were disappointingly weak on Friday with the CRB down 0.81%. Even the Dow was down less than that. Yet, I was surprised at the US dollar's resilience this week, so maybe that explains the weakness in some of the metals at any rate.

Except for Lumber, Livestock, and Oil prices on Friday, the commodities were down across the board, led by the softs, apparently still looking for support.

Silver prices were exceptionally weak as well. There should be good support at $4.30 on the nearest contract, but there is considerable bearish momentum at the moment. This could be a good buying opportunity in hindsight for bulls.

Gold prices have fallen to the bottom of a seven-day trading range, but still, that is about where the BOE sold its gold. Some traders said they heard news that the USA was going to release frozen Afghanistan assets, which included about 20 tonnes of gold. The news was reported to be released on the day of the Auction (Wednesday). Nobody knows whether any of the gold has been sold, but it sure is an interesting "threat."

It may explain some of the weakness in gold and gold shares Thursday/Friday, despite the continued weakness on Wall Street. But then, the dollar had a good week (prior to Friday), and gold and gold shares have had one heck of a run.

The more gold that is sold cheap, the more bullish I feel will be the long run impact on gold prices.

One of the things we learned in venture capital school was that at the early stages of a stock promotion (er, I mean business upstart), it is good to provide liquidity to a broader segment of the overall market, particularly when everyone is ready to promote the thing.

The more longs there are the larger the audience, and the larger the audience grows the louder the promotion roars... because they tell two friends, and so on, and so on, and so on. Didn't someone once say that supply creates demand?

Thank you Alan, keep selling that cheap gold!