With Helicopter Ben indicating earlier this week that the Fed has no immediate plans to stop debasing the U.S. Dollar, traders can rest assured that the “free money rally” is not over yet and has plenty of life left in it. In fact, we had breakouts to new multiyear highs on all of the major indexes, and all signs are now pointing towards the end of our recent two month consolidation and a likely start to a new leg up in one of the greatest rallies in U.S. History. We've closed higher almost every single day now for the last two weeks and are somewhat extended so it would be a good idea to not chase price action here, but astute traders should be ready to buy the dip one we pull back and begin to retest our breakout levels.
Looking at a chart of SPY, we can see that we are now well clear of the pivot high we formed in late February just below $135 after this weeks strong breakout from the inverted head and shoulders pattern we formed throughout the last two months.
The measured move from this pattern would indicate a likely move into the low $140's, which coincides with some key price levels from late 2007 and early 2008. As most traders know, recent resistance should form support in a healthy rally and any benign retracement back to $135 should offer traders a buyable opportunity. Keep an eye on the price action in SPY, as individual setups will likely ebb and flow in sympathy to the movement of the S&P 500 and paying attention to these key levels of support and resistance should help traders with the timing of their trades in other equities.
Traders should also keep an eye on the U.S. Dollar, as its destruction has been the main impetus to our historic rally throughout the last couple of years. If we take a look at a chart of the U.S. Dollar index, it is readily apparent that the our currency has been sinking steadily for several months now and actually increased its rate of descent over the last few days as it broke down to new lows.
This downward spiral is the key factor in the nearly parabolic rise in gold and silver recently as more and more capital flows towards the precious metals and away from our ever growing supply of freshly minted currency. We are approaching the key historic lows we formed in early 2008 at about $71, and a bounce from that level should be expected. A breakdown from those levels would likely push commodities to even more absurd levels. If the dollar can bounce and bring about a pullback on commodities, watch the $80 level as that would likely be a place of strong resistance and a good spot to watch for reentry into the affected commodities.
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