So far, the market seesaw has been predicated upon the inverse relationship between stocks, commodities and gold on one side, and the US dollar and bonds on the other. It's risky assets versus risk-averse assets per se. A lot of people will not vouch for the safety of US dollar assets or bonds but this is not the topic of this post and lets assume that they are the indicator of risk-averseness the market perceives them to be.
What follows are the charts of the US dollar index (USD) and 10-year Treasury Bond ETF (TLT). Both are showing clear setups with bias to the upside and significantly higher potential targets if they indeed move up. The USD has broken above its major downtrend line and could rally up to $80-$81, while TLT has held above its 130-day moving average, a good sign that its reversal from its bottom, and thus its uptrend, is very well intact.
UPDATE (4:36AM ET): Aussies raise interest rates another 0.25% to 3.50%... let's see how this affects a potential dollar rally, but I maintain my views.
Meanwhile, the S&P 500 has broken below two trendline support levels, and I expect it to eventually test 980, and maybe as low as 930 since the former is only 6% away from current levels and can be attained in a matter of days. Anyway, I expect the downmove to be choppy as there is still significant cash on the sidelines waiting to buy on the dip, thus shorting will still be dangerous. However, I believe the correction is already underway and the bias is to the downside.
I'd advice any one on the short side to control their position size and be quick to take profits on any down moves. I'll be centering more on short exposure in the model portfolio going forward rather than longs, but I will implement a 2 day rule: no holding of short or long positions for longer than 2 days. Also, it's better to short on rallies than to short on momentum. Going short might be the path of least resistance until 930, but market volatility (due to the bargain hunters coming in) may get the best of us. So it's better to be quick and alert to potential rallies when shorting.
