Weakness Arrived As Expected

I mentioned late last week that I expected a pullback or a pause. The last 3 days, price has stalled and is now sitting on the Red Line (Blue Arrow).

I want to point out how price has broken above the trading channel of the rally off the March low (Dashed Blue Line). Moves through the top of the trading channel are often the final blow off moves before an extended consolidation. Note how I wrote consolidation and not Bear Market or Crash. The breakout above the channel in 2003 extended to a 9% rally over the next 5 weeks. Price then sat around for 9 months.

I would expect the next consolidation to last a couple months and be more of a period of rotation from former leaders into new leaders rather than a Market Top and selloff. I’ll let you know if things change, but for now there simply isn’t much that is breaking down.

Here is the 30-minute chart on SPX. The September uptrend has now broken and we appear to be in a consolidation period. I sold some stuff when price spiked more than 2.5 Standard Deviations away from the 20-day and am looking to reload as either price falls towards back into a rising 20-day.

I keep mentioning the Dollar versus the prices of Risky Assets (Stocks, Junk Bonds, Commodities). Here is a chart of the Short US Dollar ETF (UDN) versus SPX. I am a slave to this chart. The Dollar gets extended and stock prices rise, then the Dollar consolidates and pulls back into the 50-day (Blue Line) and stocks consolidate. The Dollar started a new leg lower (UDN up) in early September and SPX went vertical.

Here is the Point & Figure Chart of the US Dollar ($USD). That is a Major League downtrend! The vertical count method targets at least 67 as the next low. This is not a recommended “Target Price”, it is simply a method of counting that Charles Dow used to figure out how far momentum may carry price.

My guess is that $USD will retest and probably break below its 2008 low near 70. My operating assumption is that risky assets will continue to trend higher until the Dollar hits this level and then we get our “correction” or “Bear Market”. Until the Dollar breaks out, that is my operating assumption.