Market to rally in to FOMC

Market Commentary:

Stocks pulled off their lows at support levels as buyers returned to the market.
As I said yesterday given the extreme short term oversold market conditions and primary support levels for some of the indexes, I expected to see some sort of a right shoulder bounce to begin and today we began to see the market try and climb out of the hole.

The focus is on the FOMC meeting and no one is expecting the Fed do anything with interest rates. For one, how can the Fed raise rates given its extraordinary debt load and deteriorating tax base? This is a reality.

Consequently, the Fed is stuck and gold buyers are scrambling to take advantage of the situation. Gold jumped $30.90 to set a new all time high at $1,084.30 an ounce. Investors are confident the Fed will not raise interest rates and so are anticipating another collapse in the dollar.

Today, crude oil prices also surged, jumping $1.47 a barrel to close at $79.60. With the daily stochastics for crude oil at %K 9 and %D at 13, it suggests oil prices are about to take another surge again if the dollar slides.

I want to point out to investors this is also a danger to gold investors because crude oil prices soaring to $90 to $100 a barrel is the equivalent of the same drain on the economy as if interest rates were raising---it will ultimately collapse the economy and when that happens, commodities will begin to crash as we saw in 2008.

Given what is beginning to look like a broad market topping pattern developing in the stock market, when it becomes all too obvious that a new bear market is beginning, the bull market in gold will end and the dollar will begin to advance. But the bubble is still in the works, at least for a while longer, as long as the Fed can hold up the stock market.

I know gold is making new highs and everyone is bullish on gold, but just remember when the stock market crashes, so will gold. In a commodity driven stock market, gold and the stock market move in tandem and opposite the direction of the dollar.

As you can see from this weekly chart, gold is in a strong surge. But notice that the RSI values are at nearly 71% and the weekly stochastics are near 90%. If the RSI gets over 75, gold stocks are likely to react rather severely on the next correction, so watch your back.

TECHNICALS

As expected with deeply oversold short term conditions the market is attempting to nest. Today, the Russell 2000 index daily stochastics turn positive as the Russell 2000 finished up 1.4%.

As both of these charts show a short term bounce is trying to form here. But I would view any short term rallies as just that—short term and unlikely to endure given the overall market weakness and risk aversion that is growing.

Market breadth indicators are very weak and until they strengthen back into bull market territory the market has to be viewed now with the same perspective as we viewed the stock market back in 2007 when breadth began to break down.

We could turn things around and rally in the last few weeks of the year if the Fed will’s it so, but it looks as though they have their hands full with a rapidly deteriorating commercial real estate market. Even one of the Fed governors recently raised the alarm last week in a very unusual breach of Fed speak.

Consequently, we are looking to sell into any rally if technical weakness persists.

Technical Outlook

S&P	Trend	Support	Resistance
Weekly	Up	876	1200
Daily	down	1012	1110
Vix	Bullish	20	24.50

R3	1077
R2	1058
R1	1051
Pivot	1039
S1	1032
S2	1019
S3	1000

NOTE:

Oil	Trend	Support	Resistance
Weekly	Up	65.00	90.00
Daily	Down	65.00	90.00

Note:

Euro	Trend	Support	Resistance
Weekly	UP	1.4304	1.5066
Daily	Down	1.4440	1.5006

R3	1.5074
R2	1.4946
R1	1.4835
Pivot	1.4707
S1	1.4596
S2	1.4468
S3	1.4357

S&P500

- Long term trend remains up while intermediate trend remains down

- Yesterday's early gap down was met by dip buyers bring market back in to positive territory. NYSE McClellan Oscillator jumped back above oversold signaling short term higher price movements in the coming days. We are likely to see Fed keep rate steady today which should give the market some fuel to rally higher. This coming rally should last only a few days as the market is forming a head and shoulder pattern. With the right shoulder being formed in the process with resistance at 1070-1080. Long term trend for the S&P remains up, but the Russell and the Nasdaq have broken down below the Sept. low. This calls for more weakness for the month of Nov.

Crude Oil

- Long term trend remain up but intermediate trend remains down.

- Oil daily chart has formed a flag pattern. momentum is starting to move higher, this is setting up as a bullish pattern for oil price in the short term.

Gold

- Long trend remains up while intermediate trend is Up

- A few days ago I wrote about the technical pattern in gold is indicating the chance it would break away from the general market and move higher. Now the old resistance of 1070 now becomes support. The measured target to the upside is around the 1150, and then 1300 for the head and should pattern.

US Dollar

- Long term trend remains down, while intermediate trend is up
- Dollar broke through the $77 yesterday hitting my initial target but failed to close above that as gold rallied hard the day before FOMC. It seems like the market is expecting the Fed to keep rate steady and continue with its QE. This will be fundamentally bearish for the dollar. Technically, momentum also started to turn down yesterday. First target to the down side is $76.










--
Michael Chang
Technical Analyst
Washington Asset Advisors