We’ve seen a significant gain since the bottom in March of 2009, up about 80% since those 666 S&P 500 lows. Now the market is facing significant resistance, even after the massive $600 billion QE2 plan to inject more liquidity. The resistance comes both in the US dollar beginning to find trend line support and the S&P 500 showing potential resistance at what could become a double top formation.
First let’s have a look at the long term dollar chart:
It’s clear that the US dollar, despite a large drop in recent months, is beginning to find support at the trend line formed from previous lows. If this trend holds it could bolster the ailing US currency and provide room for not only a short term reversal, but some significant appreciation on the back of Europe’s woes and a correction in the commodity currencies. On the other side, the dollar is seeing significant headwinds towards sustainable appreciation because of the unsustainable forward looking debt load of the US government combined with the massive stimulus and easing programs.
Now let’s have a look at the S&P 500 chart:
We see the potential for a double top formation in the index around 1220. If this level can not be broken to the upside then we have some serious downside potential to contend with in the US stock market. The rally of around 15% over the last two months indicates that many are confident in putting their money in to equities, rather than bonds, and with that a lot of speculative stocks have seen impressive gains. But another side of this rally is that it has largely been supported by extremely loose monetary policy, a “Bernanke put,” is what many are calling it, meaning that there’s no reason to buy protection (or put options) on your investments because the Fed will be there to prop up the market.
This is an inflection point. It has the potential to decide the direction of where many different markets, including currencies, commodities, equities and bonds, will be trading for the next several months ahead. Should the dollar fail its trend line support and the S&P break to the upside of the resistance around 1220 we’ll see a massive rally in other currencies, commodities and equities. If instead we see the dollar hold firm and appreciate against other currencies, reinforcing the trend line support and the S&P breaks down at the aforementioned resistance level then we could see a daunting correction in other currencies, equities and commodities.
All we can do now is watch, wait and act accordingly…