The Freak’ing Market Nears The Top ($SPX, $SPY, $USD, $UUP)

Posted by Investing Freak on January 07, 2011
Market Analysis

Every day we see the market swing higher and higher and higher and then one day it swings lower we tend to get fooled into the belief that the market has topped. If you have never felt that way you either must work for Gold in Sachs (they seem to have a golden goose) or are some genius and my hats off to you!

The charts I will be presenting to you further down I have kept a close eye on for months (yeah months!) but only recently has there been an urge to share the potential move that’s coming. Weekly charts will be used because I am not timing the market by the minute but merely where its heading based on my observations. There is no one way to play the market or so use this in conjunction with your own research and observations. An old saying comes to mind:  “Ask 7 or 8 opinions but make your own decision.”

To keep me motivated into watching the following charts I decided to purchase an UUP option call expiring January 2012 with a strike of 23 a good while back. That position is up more than 30% but having it on my position screen has kept me aware on moves that the dollar has made.

In the UUP weekly chart there seems to be a Descending Triangle Pattern in the works which is a bearish formation. That being said this is the weekly chart so I don’t expect UUP to break below $22 range for months and years to come. Short Term UUP has resistance at the 50 week moving average (23.43) and if it is able to break through it has a better chance for a swing to the expected 25 area.
(Click Chart to Enlarge)

Wait! So does this mean the dollar is destined for doomsday in a few years due to this pattern? I will not give an answer to that mainly because on this next chart of the US Dollar Index ($USD) the opposite pattern seems to emerge. The Ascending Triangle is a bullish formation and this points to a break to the upside (suggesting dollar appreciates more in few years). One thing to keep in mind while reading this blog is that lines are drawn differently by different people and if a daily, monthly or yearly chart was used the patterns might point elsewhere but weekly is my choice. As with the UUP short term view, $USD also is stuck just below its 50 week moving average of 80.42 and a break and hold (of the weekly) over that resistance would put the dollar index on a better position of heading back to the top of the pattern which is around 88 area.
(Click Chart to Enlarge)

So far I’ve talked about the dollar and yet the title claimed to be calling a market top. I will not disappoint my fellow readers that easily. On the last of the trio charts I have drawn plenty of lines and will attempt to describe with words what dollar strength and breaking over its resistance would mean for the market ($SPX).

The top part of the chart has $USD again showing its price performance (irrelevant since I’m just looking at the pattern). The top red line has been drawn to indicate an important area where when the USD breaks below (weakens) it tends to send the market into “party” mode and when the opposite is true things go into “doomsday” mode (for the most part).  The top green lines are a more reserved prediction just in case the red line acts as resistance and dollar would go sideways for some time but eventually break up since the pattern is the aforementioned Ascending Triangle bullish pattern.  If we break out of the resistance zone more rapidly (blue dashed line) then I call a market top late January-February 2011. It could come at the current highs or the market could make one last push for $1300 (since the moves aren’t 100% mirrors of each other).
(Click Chart to Enlarge)

So there you have it! I have called a Freak’ing Market top 700 words and 3 charts later (and many months of patiently observing the weeklies). My conservative guess if I was forced to make one would be a correction to 1030-1075 area.  That’s around 16-19% correction from the current highs.

There you have it! I hope you all had a Happy New Year and enjoyed reading this post and many others before it (although they’ve been sparse due to realities of the busy life).

Remember to chant the InvestingFreak phrase whenever in doubt “See it, Call it, Trade it, Buy it” 😀

Happy trading and money making!

-K

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