We've witnessed recently in the U.S. Equity Markets what appears to be a massive selloff but I am of the opinion that equities are headed higher. To make my case, I'm gonna offer my opinion of a few different futures markets. My method of analysis, by the way, is what I'd like to refer to as a "technical to fundamental" approach. Meaning that I analyze the technical situation of each market and based on what the charts are telling me, I then form a fundamental picture. So, let's get started.
The US Dollar: For four weeks now, U.S. Dollar futures (/DX) has been consolidating. The position of this consolidation led me to believe that the dollar was more than likely going to break to the downside and as I currently write this, that breakdown appears to be occurring. But, it's a little too early to say for sure since price is still hovering just below a short-term support level. However, if the dollar is to continue a downward move, that increases the likelihood of a rally in equities.
Gold: You can't talk about the dollar without talking about gold. That being said, while others were calling for lower gold prices as a result of the breakdown a few weeks ago, I felt that gold was a buy at these levels. What we've had since that breakdown is a small trading range which has broken out today to the upside and hit my first target of $1,117 - $1,120. I expect to see gold retrace and if or when it does, there may be strength in this move if the retracement is checked by bulls at a higher level of support.
US 10 Year T-Note: As we all know, when investors are weary of equities, they tend to flee to the government bond markets for safety. Well, the 10-Year Note, along with the 30-Year Bond appears to be setting up for a downward move. The major trend in both of these markets is down, but we've experienced a rally for the past few weeks. I think that rally has exhausted itself and the down-trend is about to resume.
The Indexes: I'm not gonna cite any particular index here but I will discuss the indexes in general (S&P 500, Nasdaq, Dow Jones, Russell 2000, etc.). In my opinion the equity markets themselves are in what I consider to be key positions in which they will either rally or further break down.
Tying It All Together: Because the dollar is falling, one has to reasonably expect for equities to rise and if the fall of the dollar is to be sustained, the rise in equities is also likely to be sustainable. Likewise, if investors are leaving bonds, it stands to reason that they are willing to return to equities. I also mentioned gold, which I think doesn't have that much to do with equities but the rising price of gold helps to validate the case for a weaker dollar.
If one were to ask me which index appears the most bullish, I'd say the NASDAQ simply because the Nasdaq's recent fall was checked by buyers before it could erase 50% of it's earlier gains. The Nasdaq has broke out of it's 4-month trading range to the upside and it's likely that this recent fall is a test of that breakout. The other indexes are in similar positions, being that their falls were checked before reaching key support levels. As of this writing, if that behavior continues, the odds favor rising equity markets. I'm not saying that any of these things are going to happen immediately. I expect for these markets to move counter to everything that I've said for a short time, essentially retracing and digesting these moves, before going in what I think is their ultimate direction. What I'm doing here is giving a "heads-up."
One thing to bear in mind is that these moves which I'm forecasting for the equity market won't mean much until the S&P 500 and the Dow break out of their trading ranges decisively. I'd like to see the S&P clear out the 2120 area, and the 18,100 area for the DJIA. Until that is done, one can simply consider any up-move to be a short-term swing. One could also say that in an environment in which the Fed is expected to raise interest rates, any up-move may be only be short-term so that other players can sell out at higher prices. That's one of those things that we will have to see when the time comes.