Dollar & S&P 500 Update

This is a daily chart of the dollar index. Fundamentals are against the dollar. With continued U.S. deficits and low real interest rates, money will continue to drift towards stocks and real assets. The fiscal cliff is all a fiasco in my opinion. Politicians would not risk another dip in the economy.  There maybe more volatility until a compromise is reached between the Republicans and Democrats until Christmas time. This volatility is a good chance at value investing- many strong companies would be trading at a discount. The second chart is the daily S&P 500. We are currently at a resistance zone and volume is decreasing with the increasing price. This looks short term neutral/bearish for the S&P 500 (good time to buy) and may prop up the dollar short term (when you sell stocks you are exchanging them for dollars). Interest rates cannot rise as the Fed is trying to stimulate the housing market, which in turn stimulates other sectors in the economy. Also, it’s is highly unlikely the U.S. will ever change from a welfare and warfare state. This is bearish for the dollar and bullish for stocks and real assets. It looks like we are going to test the 79 area. If this support area does not hold then the dollar could suffer major downside.

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Here is the S&P 500 chart:

Gold Update

Gold is looking bullish at the moment. Fundamentals for gold include: currency devaluation, low real interest rates, uncertainty with the fiscal cliff and debt crises, and uncertainty in the Middle East. This is a seasonally strong period for the precious metals with all the celebrations in various cultures around the world. I’m looking for a test of $1800 within 1-2 weeks.

The following is a daily chart of gold:

The etf, GLD, options action looks bullish as call open interest and volume > pull open interest and volume.

Silver Update

Silver once again looks bullish after a long period of consolidation following its parabolic move upwards in 2011. Literature on the fundamentals of silver can be found all over the internet. In brief- silver is used in tiny amounts for many industrial and medical applications and is held by investors as a hedge against the currency devaluation and low real interest rates. Silver demand is set to continually increase as the BRIC countries (Brazil, Russia, India, China) continue to grow and as fears of  a Chinese dip dissipate. The Federal Reserve has announced it will keep rates low for a few more years and has engaged in QE infinity, so that will boost inflation and benefit silver. Fundamentals are all there as well as technicals now. Also, there is currently a war premium in the price of precious metals because of the Middle East power keg, and there is no telling how much things will escalate with the increasing tensions in Syria, Israel, Iran, Palestine, Egypt, etc. Gold has been in a bull market for more than a decade and silver should continue to follow suit. I believe silver will greatly outperform gold,  however silver is much more of a volatile ride. Risks that would break silver down include: ending QE and raising interest rates, dollar appreciation from Europe’s debt crisis, Middle East tensions decrease, falling oil prices, rising margin requirements, and slowing emerging market economies. I see none of these risks hitting the headlines in the near future.

The following is a weekly chart of silver. As you can see, we have broken out of a descending triangle to the upside.  The MACD is now bullish and the price of silver has entered a new uptrend channel. My short term target is $37. Once that is broken, I believe we will bounce to the next Fibonacci resistance level of ~$44 before testing the $50 level for the third time.

Here is the options action in SLV etf. Call options volume and open interest > put options volume and open interest. This is bullish.

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