If You're Waiting for Gold to Rally, Watch This
By Jeff Clark
December 2, 2008

It's all about the dollar.

One look at the following charts tells the whole story of the past three months...

You can see the tremendous inverse correlation between the U.S. dollar and the stock market. As the dollar has rallied 15% in just over two months, the S&P 500 has lost 33%.

The stock market isn't the only victim. Commodities have collapsed, too. Oil is down 50%. Gold is off 12%. And the Reuters Commodities Index (CRB) has lost almost 40%.

The strength in the dollar seems irrational. After all, the U.S. Treasury has committed to printing trillions more dollars in an effort to bail out corporate America and salvage what's left of the housing and banking industries. This action should be inflationary and it should depress the value of the greenback. But there's a stronger force at work right now... the need for liquidity.

Investors and institutions are dumping stocks and commodities and buying dollars with the proceeds. This supply/demand equation is pressuring asset values and propping up the value of the dollar.

But it's temporary.

Just as oil prices rallied during the summer even as inventory levels swelled, the dollar has so far defied the laws of economy. It's an aberration, though. Oil prices eventually fell to reflect market conditions. And at some point, the dollar will fall.

You can see the negative divergence that formed on the MACD indicator (below the chart) during the most recent rally in the dollar. This indicates the momentum behind the rally is weak. The chart of the dollar itself is also tracing out a potential head-and-shoulders top formation. A break below 84.50 should kick off a decline down to at least 80, and perhaps even as low as 76.

A falling dollar is obviously bullish for commodities. So gold and oil should appreciate nicely in this environment.

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To the extent that a rallying dollar has depressed stock prices over the past several weeks, a declining dollar should cause stocks to rally, too.

So keep an eye on the action in the dollar. Once it starts to fall, it should usher in the rally we've all been looking for.

Best regards and good trading,

Jeff Clark

Junk Bond Market Freezes
U.S. companies were locked out of the junk-bond market in November, putting half of American corporations at risk of being unable to raise cash.

The current environment is causing market participants to harken back to 1991, when the collapse of Drexel Burnham Lambert sent the junk, or high-yield, bond market into a tailspin.
WSJ ($) Read on...