SPX, US Dollar, Gold: Charts Point to at Least a Near-Term Rally

Last update noted that the market was in a dangerous position and oversold, but that there were some indications that a fourth-wave relief rally was due.  Bulls managed to find support where they needed to, and the charts have now solidified the view that at least a near-term rally is likely to develop in equities.  Also of note, there are QE-Infinity liquidity injections coming on Monday and Tuesday which will total about $23 billion, and which should help put a bid under equities.

We should always assume the trend remains the same until proven otherwise -- and recently the intermediate trend, at least, has been down.  I continue to believe this is a dangerous market for bulls as long as it hangs around beneath the key price levels, but recognizing that danger is not the same as being completely sold on a long-term bearish outcome for equities -- and the fact is, I'm not yet sold on the long-term bear case.  That said, until some key levels are reclaimed, there's no real reason to be intermediate or long-term bullish either.  I've been driving myself to distraction trying to interpret this market's long-term intentions, and the bottom line is:  there simply isn't enough information yet to form a well-reasoned long-term stance.  So, for the moment, I've decided there's enough ambiguity in the charts that the only rational long-term stance is equities neutral.

Something purely anecdotal that bothers me on a contrarian level:  I swear I've seen at least 10 articles recently which are predicting an imminent market crash.  I know it's anecdotal, but that seems like too much rabid bearishness.  One of the basic rules of the market is that the majority are usually on the wrong side of the trade.

Anyway, let's discuss a couple things I'm watching to provide clues which should help tilt the playing field in one or the other direction.

One of the key markets that has yet to tip its hand is the US Dollar.  On July 19, I noted that caution was warranted for dollar longs, and even shifted my stance on the dollar from long-term dollar bullish to long-term neutral... and the dollar dropped like a rock immediately afterwards.  Then on September 20, I noted it could find a bottom in that zone and wrote that "I've finally started to take quick stabs at long dollar positions again."  It has been rallying ever since.

The dollar has finally reached another key inflection point, and I think risk is shifting again and is now increasing on dollar longs.  If the dollar can go on from here to form a five-wave rally (it needs a fourth wave down and fifth wave up), then that would be an all-clear for dollar bulls (and likely for equities bears).  But presently, the move up from the September bottom is still a three-wave rally, which is now facing resistance, and which may be just about complete.  I have to give a very slight intermediate and long-term edge to dollar bears here, because the larger rally from May 2011 counts better as a corrective wave than an impulse wave -- bulls need it to become impulsive to help confirm my original read that the dollar bottomed its Grand Supercycle wave at the 2008 print low.  In any case, I believe the dollar is a crucial market to watch going forward, since if the dollar heads lower, then equities will be "worth more" as measured in dollars (aka: inflation).

Another unclear market is gold, which has traded in a large range for more than a year.  I've outlined some buy/sell triggers for gold on the chart below, but I should note that the 200 point trigger is quite aggressive -- so I would suggest traders remain cautious of any whipsaws occurring around the trigger point (if and when we get there, of course).

Next is the S&P 500 (SPX) intermediate bearish wave count, with the bull count noted in green.  I'm presently projecting at least a short-term rally to the 1378-1390 zone, but sustained trade above 1403 would be the first warning to bears that the (assumed) rally could grow some legs. (continued, next page)

Finally, a simple short-term SPX chart with a bullish trade trigger.

In conclusion, bulls indeed managed to find support on Friday and the charts suggest a near-term rally will develop in equities.  Currently, it appears more likely that this will simply be an oversold relief rally, but this is another potential inflection point, so we'll watch the key market levels to help determine if bulls can turn it into something more meaningful.  Trade safe.