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Possible huge rally on the horizon

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Here I present two pieces of evidence:

The US dollar is getting overbought in the longer term. The US dollar index, daily cash settlement, for the last two years is shown on the chart below. A breakdown below the brown line occurred in February of 2011. After the low in May of 2011 there has been a steady rise in what looks like five waves, and now $US backtests the brown line. When this advance fails, the rally should be underway. A prominent negative divergence is on the RSI and ROC; being a warning sign of a waning of momentum. However, the stochastic is still rising, currently at 57, so this advance is not finished.

The market is getting overly bearish with all kinds of bad news out of Europe, Facebook failure, lowered earnings estimates going forward, market reversals for no apparent reason, seemingly rigged unemployment numbers etc. Last week TSP Talk Sentiment Survey came in at bulls to bears ratio of 1.14 to 1. Remember anything in this system below 1.25 to 1 is a buy in a bull market. If we apply the same metrics to the AAII Investor Sentiment Survey current data for the week ending 7/18/12, we see a 0.53 to 1 ratio. Of course these are only examples, and some could argue that these surveys are dumb money; however overly bearish sentiment may end up in a breakout.

What could cause a big rally? Well, it is the reelection year of the presidency, so it is reasonable to expect some market window dressing, even if it is an inflation and $US debasing rally. It may be Ben Bernanke announcing another round of quantitative easing (QE) in an effort to get the $US rise under control and slow down deflation. Some additional monetary easing policy announcement in Europe or even China could also be forthcoming. Or perhaps the ordinary investor is tired of getting taken with all the day trader knee jerk movements, and wants to steer clear of stocks.

C Fund and S&P 500-bull_07_23_12-jpg

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  1. CrabClaw's Avatar
    looks like the right side of a nice H&S being put in on the VIX... kind of goes along with what you are presenting here. Target would be around 10, VIX has not been there in many , many years. Good stuff, thanks for sharing.

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