The Thanksgiving Holiday is normally dead time for global markets, but this year was a definite exception. During the holiday the EURO broke out and the dollar broke down out of a weekly trading range that has been in force for over six months. By the time US traders returned to the markets, intermediate-term damage was done and critical levels had been surpassed.

As Chart 1 suggests, the dollar is now likely to test the major support zone between 78-80 that has held on every attempt since it started trading against other currencies in 1972. Investors should realize that this level has held on tests in 1978, 1991, 1992, 1995, and 2004. It is very likely that AT A MINIMUM the dollar will hold at this level for a while and at least consolidate, if this level does not prove lethal to its bear market. Therefore while the dollar has broken down out of a six month range and has even broken above last year’s highs versus the British Pound (though resistance at 2.00 is right overhead here as well), there may be an intermediate and short-term limit to how far and how fast the dollar can fall.


Chart 1: Dollar Breaks Trading Range But Major Support Not Far Away. Courtesy StockCharts.com

Europe in particular is playing up the dollar decline in the press as though it were breaking all-time lows. That is not yet the case. But markets are reacting to the dollar down move in fairly significant fashion. Just beware that the downside is somewhat limited absent a very surprising move in the dollar below major support without much consolidation, which is unlikely.


Chart 2: Crude Oil Hitting Weekly Trendline Support At Top of Support Zone. Courtesy StockCharts.com

The dollar decline comes at an important point for many commodities and is reigniting bullish flames there. Chart 2 shows that crude oil has tested an important trend channel support zone around 58 and is rallying off of it with help from the weather, OPEC rhetoric, and the declining dollar. Nearby natural gas futures have broken out of a multi-month consolidation to the upside, and oil stocks led the bottom as they would be expected to do. We suspect commodities will run as long as the dollar is weak and as long as the global economic slowdown does not look to be accelerating too briskly. One way (among many) that investors can play both the dollar decline and the commodity runup is via ETF’s in commodity indexes such as GSG, shown in Chart 3. Note that the trading range in force since September between roughly 40 – 43 has been broken in GSG while its relative strength has broken above its down trend line and while its OBV has led the breakout. Investors wanting a vehicle to play the move in oil, gold, and other commodities could use GSG or other similar ETF’s – just realize you may want to take half profits when the dollar approaches its major support zone.


Chart 3: Goldman Sachs Commodity Index Base Breakout. Courtesy StockCharts.com

The Thanksgiving fireworks didn’t stop with the dollar and commodities. Both the Dow and the S&P broke down through their up-trend lines early this week after the Thanksgiving holiday ended. We have suggested that investors wait for virtually all of the major indexes to break their up trend lines before turning even short-term bearish on the market. While the S&P and Dow broke their trend lines, the Nasdaq and Russell did not. And in fact both bounced perfectly off of trend line support, shown in Chart 4, on Tuesday. The bounce had fairly good breadth, but new highs have not yet been made in any major index. Therefore this week’s lows in the Nasdaq and Russell are critical for investors to watch to get a short-term trend feel for the market. A breakdown by all major averages below this week’s lows would setup at least a more significant correction in the market than we’ve witnessed since the July lows. As long as this week’s lows hold, we suspect the bullish short-term trend deserves the benefit of a doubt.


Chart 4: Nasdaq and Short-term Trend Channel Support. Courtesy StockCharts.com


This week has proven important for housing stocks potentially as well. Chart 5 shows the housing index breaking above its 200 ma on good volume. In a normal housing crunch, when the NAHB Housing Index bottoms, housing stocks also bottom. Many have suspected that this housing crunch is likely to be much worse than normal however, so this may not be the case despite the NAHB index bottoming two months ago. Yet housing stocks are starting to lean toward stabilization in housing beginning. Particularly if the HGX can break above its 50% resistance level around this week’s highs on good volume, it will suggest that the bad news in housing will not accelerate and that housing stocks may well have put in a bottom. For housing stocks to give such an indication would add further evidence to the idea we have been putting forth since Spring that we are moving toward an economic soft-landing and not an out-right recession. The action in housing stocks from this point forward will be important to watch.


Chart 5: Housing Breakout Above 200 Day – Resistance Ahead Critical. Courtesy StockCharts.com

Since this summer we’ve been somewhat cautious on the market and have long suggested that investors have a large TLT (long Treasury Bond ETF) exposure to balance out any net long stock exposure. This was partly done as a hedge against potential recession and partly done because bonds are typically a more certain trend higher going into an economic slowdown. As Chart 6 shows, bonds have done very well since we’ve suggested such a strategy. In fact, as the top panel of Chart 6 shows, the relative strength in bonds has matched that of the S&P since the summer so that investors with TLT exposure have not fallen behind the returns of the S&P, and in our opinion have done so with considerably more safety. However, bonds are reaching levels where we would start to take some profits. TLT’s have one resistance level around 92.5 that we think may be formidable. Further ahead there is resistance from 96-98. Somewhere around 92 we would BEGIN to shift out of bonds and TLT’s slowly over time. As the economic slowdown becomes clearer in focus to be a soft-landing, bonds gains and utility in a portfolio will start to diminish.


Chart 6: Bonds Kept Up With Stock Gains But Are Reaching Profit Levels. Courtesy StockCharts.com

We continue to suggest less than aggressive allocation to global equities, however we would no longer look to add or accumulate TLT’s on corrections and would begin taking partial profits on TLT’s over 92. We still expect that the slowdown is not over and that the Fed will not letup on a tightening bias until the slowdown develops more clearly so that inflation does not reappear and get entrenched, but bonds gains have been swift and and further rate drops will become less likely unless a recession develops. The risk of recession is still large enough that we would not suggest selling ALL or even half of TLT’s yet, but some profit taking will soon be in order we believe. We also continue to like some pairs, and some select big-cap dominated groups along with the small number of stocks meeting our criteria for below normal allocation to stocks with partial short-hedging in weaker groups.

Lots of bonds (TLT’s) and cash as well as light big-cap exposure still seems prudent to us here until the environment becomes clearer. Long/short pairs and some broad big-cap exposure to some of our preferred groups can be sparingly participated in as well. The tradeoff between bonds and stocks should be closely monitored as bonds are providing a critical cushion to the blow of a slowing economy in what we suspect is a budding soft-landing that often prove difficult to trade.



Our US selection methods, our Top RS/EPS New Highs list published on TradingMarkets.com, had readings of 39,15 and 41 with 3 breakouts of 4+ week ranges, valid trades meeting criteria in OPNT, BRCD, TV, and no close calls. This week, our bottom RS/EPS New Lows recorded readings of 4, 8 and 3 with no breakdowns of 4+ week ranges, no valid trades and no close calls. SPI, BWP, CHDX, OTEX, OPNT, BRCD, TV remain open trades on the long side from this methodology.

Mark Boucher has been ranked #1 by Nelson's World's Best Money Managers for his 5-year compounded annual rate of return of 26.6%.

For those not familiar with our long/short strategies, we suggest you review my book "The Hedge Fund Edge", my course "The Science of Trading", my video seminar, where I discuss many new techniques, and my latest educational product, the interactive training module. Basically, we have rigorous criteria for potential long stocks that we call "up-fuel", as well as rigorous criteria for potential short stocks that we call "down-fuel". His website is www.midasresourcegroup.com.