The Federal Reserve dove deeply dovish. What was next on the menu seemed straightforward, like buying into the latest breakout for SPDR Gold Trust (GLD). After all, the U.S. dollar index (DXY) took a plunge in the wake of the Fed's accommodation and underlined the Fed's stand-down. To my surprise, GLD reversed the next day, but at least it held support at its 50-day moving average (DMA).
Source: FreeStockCharts.com
The retreat in gold surprisingly came at the same time that long-term rates fell further. The iShares Barclays 20+ Year Treasury Bond Fund (TLT) crept up incrementally closer to its high for 2019. The bond ETF is closing in on a major breakout.
The U.S. dollar staged an important rebound and compounded the surprise. I did not expect to see such a strong bounce without rates increasing at the same time.
Source: TradingView.com
The chart above demonstrates the importance of the 200-day moving average (DMA) to the U.S. dollar index. Once that critical trendline breaks, the dollar tends to follow-through in the direction of the break. So far, for all of 2019, the U.S. dollar has tested its 200DMA three times without breaking support. How much longer can this last? It now depends perhaps on the market's interpretation of a strong economy combined with a dovish Fed. I took the dollar's strength to mean that currency traders were reacting to the downgrade in U.S. growth prospects. The rush for "safety" also strengthened the Japanese yen (FXY) on the day.
The parallel rally in the S&P 500 (SPY) caught me a bit by surprise because I concluded that the lackluster trading following the Fed was the best the market could muster. The trading looked like it confirmed a bearish divergence that solidified my short-term bearish call on the stock market. The contrary S&P 500 (SPY) jumped 1.1%, reversed the previous two days of soft trading, and closed at a new 5-month high.
This trading action once again puts the bears (like me) on notice. The bearish signals preceding the 1-day rally did not resolve into downward action like the last episode which briefly broke 200DMA support. The signals also failed to produce strong setups for shorts which in itself could have been a (short-term) bullish signal. Even breadth returned a bit. The last outstanding caution is the near parabolic way in which some important individual stocks are moving, especially big cap tech. A pullback in these names is due and the end of Apple's (AAPL) product announcement on March 25th could be a sufficient catalyst with traders selling the news. The reaction to that next pullback, in whatever form, should mark an important juncture: the final exhaustion of 2019's incredible rally OR the final rest stop on the way to new all-time highs. Stay tuned....!
Be careful out there!
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