Mike Paulenoff

Is Gold Anticipating the Dollar's Peak?
Market Analysis by Mike Paulenoff, Jay Matulich & Harry Boxer

Our Wizards Mike Paulenoff, Jay Matulich, and Harry Boxer weigh in this week on the direction of equities, commodities and currencies. According to Paulenoff:

The chart below (created using The Bloomberg) shows the daily price action of 10 year T-note yield compared with the action in the Dollar Index. If I am not taking too much "poetic licence" here, might we come to the conclusion that when YIELD climbs, the dollar has a tendency to rally, too?

As we approach the next FOMC meeting on April 30th, and although futures are building in a 100% expectation of a 25 bps cut in Fed funds to 2.00%, if the FOMC statement suggests that the cut is the last one for a while, might not the markets take that as potentially, eventually, dollar supportive?

Perhaps that is what the chart is hinting at now.

While the dollar continues to weaken, lately gold has stopped responding to this weakness. Since mid-March, the Euro actually has carved-out a "rising wedge" pattern, which depicts a series of horizonal rally peaks (around 1.59.00/85 juxtaposed against a series of rising pullback lows), which are putting upward pressure to thrust the euro above 1.6000 into new all-time high territory. Conversely, we have gold prices ignoring the still-bullish pattern in the euro/$, and instead, in the grasp of a downside correction that points towards additional weakness beneath the 4/01 low at $872 on the way to $850/$820.

Why the divergent action?

My suspicion: that gold prices are ... ... anticipating 1) a peak in Euro/$ in the days ahead, and 2) that at the next FOMC meeting on Apr. 30th, the Fed indicates that it is has cut enough to stimulate aggregate demand, and that it is concerned about inflation, which will warn the markets that the current rate cut cycle is complete- and that the next Fed action will be to RAISE Fed funds. If any of my suspicions are on the mark, then both gold and the Euro are (will) anticipate the shift in the direction of rates in the upcoming days.

. According to Jay Matulich, money manager at Septos Capital Management:

We've had a good April. While the market's been down five straight months basically, April's going to turn out to be positive, as of right now. I do think, however, we do have some more weakness in May, which sets up for a terrific rally starting in June that I think lasts into the first quarter of 2009.

You look at the material stocks and the commodity stocks -- they're a mile deep and an inch wide, meaning a really crowded trade, and from my perspective they just don't set up for a real strong market right now. So much momentum money has gone into that area in February, March and now April that any type of dislocation could spell some trouble in that area which could affect the overall market.

In addition, I think we have some more dislocation to go in the financial arena, which could be very problematic, and I just think we need a little bit more time. The financial arena may have a trade on a relative basis, but I think it has another year or two to go before you start getting absolute performance out of that group. The wind-down and de-leveraging has been a lot and is going to continue and I don't see where the earnings power is going to come from.

However, I'm liking the overall market going forward. Technology looks pretty good. I'm looking for a similar type of rally that happened in August 2006 where the equity markets bottomed, as oil had been running up through the summer. We had a post-August rally with stocks up -- so basically you benefited by being long stocks and short oil and commodities -- and my sense is that's what we're setting up for now come June.

Harry Boxer, of TheTechTrader.com, writes:

The semiconductor group has led the market down but is basing nicely and on the verge of breaking out. The chart of the ETF for the group -- the SMH -- shows a head and shoulders top that peaked out in July and actually broke down in October when the market broke. The stock went on a 5-wave decline (starting from the July high) that was completed in January.

Since then despite lower lows in some of the indicators the SMH made steady although belabored progress. The whole 4-month pattern could be a nice potential base for a move substantially higher. The On-Balance Volume has been moving up steadily the last couple months, although the Money Stream and Balance of Power are kind of neutral. The SMH is at a little mini triple top in the 30.77-.87 zone that if broken could lead to a solid advance in the market, because you often see the semiconductors lead the market up and down, and I believe they broke early in July before the market broke and led them down eventually.

So let's look for the possibility of the SMH as well as the Philadelphia Semiconductor Index (SOXX) breaking to the upside and taking the rest of the market with it in a solid potential late spring/early summer type of rally. The 33- 33 1/2 zone from the highs in December is the initial target, and secondary target is up around the 35-35 1/2 area, then longer-term target around 39. Support is in the 28 1/2 area, with minor support at the moving averages. I'd like to see it hold in the 29.40-.65 area where the gap is -- that should be formidable support, and we'll see if we get the breakout to the upside that springs the index up.

One of the most popular stock in the group is Broadcom (BRCM). The chart shows a breakdown in October and a steady declining channel that bottomed in March. The stock then thrust back up and consolidated in a mini flag, and broke out on Friday, up 1.42 on 15.7 million shares. It's not quite thrusting yet, but we're starting to see a move up in the technicals, and this could be one of the leaders in the group and one to keep an eye on.

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