During the second half of the trading day today, we saw the dollar rallying, with equities giving back early gains and closing flat. Although we should consider last week's stock market action bullish, with a nice recovery from early-week distribution, a couple of factors give reason for caution. First, the Chinese market showed some serious weakness last week. The Shanghai Composite Index fell 5.8% last Monday, followed by a 4.2% drop on Wednesday.

Following the Wednesday selloff in China, the US markets gapped down at the open, and then charged higher to close solidly positive for the day. The US markets continued to follow-through during the remainder of the week. Wednesday's action was intriguing, in that it was allegedly due to a report showing surprisingly low oil inventories, which traders took as an indicator of improved demand, recovery, etc. Personally I think it is just as likely that Geithner told Goldman Sachs to buy the open to put a floor under the market after the cluster of distribution days in China.

Of course, I have no way of knowing. At any rate, getting back to the charts, I recommend Corey Rosenbloom's recent post, Markets at Critical Inflection Points. He points out the dollar, oil, the equity markets, and the bond market are all at key inflection points.

To recap, bonds appear to be at resistance; Stocks appear to be at resistance; Crude Oil appears to be at Resistance; and the US Dollar Index appears to be at support.

This is how studying intermarket (related) charts can add insights into your own market by watching the technical (trend) structure of related (or non-related) markets.

I’m reminded of the teaching of Mark Douglas (Trading in the Zone) when he said “It’s best to find areas where a market HAS to make a move (inflection point) and then once that inflection up or down occurs, then join the move in progress (instead of getting ego involved and trying to predict the outcome)” (loose quote)

Since I believe the administration is very active in this market, I find myself speculating as to their priorities, and where they might intervene next. Specifically, I wonder whether propping up the dollar may soon become a bigger priority than propping up the equity markets. Looking at the chart for UUP, we can see the dollar near key support. Volume pattens indicate a bottom may be forming.



I will be watching the dollar closely. In any event, there are a good number of bullish charts to choose from. Here are a few current long positions (I also mention some hedges below):

- STEC



- NEU



- JDSU



- CIEN



- LNN



- CORE



- HLCS



- BPAX



To hedge these positions, I am holding short positions in IYR, XLY, ISLE, RKH, and WFC. Incidentally, RKH, the regional bank ETF, lost almost 2% today on increasing volume, forming a double-top. This is another reason for raising caution levels.