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Cross-currents at work

Some interesting cross-currents at work with QE2 winding down in the next months.  A few warning signs are in place, most notably the U.S. Dollar continues to push higher – something that has almost always coincided with lower equity prices in recent years.

The Dollar is testing a support level that has recently turned into resistance.  If it breaks through at this this level, it looks like the Dollar Index could run up a bit more before its next resistance.  Also potentially bearish for the U.S. markets is an apparent breakdown in the Emerging Markets. EEM has broken trendline support and may soon test its 200 day moving average.

Perhaps the best “tell” of future prospects within the Emerging arena has been China, which has led the U.S. markets by a few months but correctly pointed future directionality over the last few years.  China has formed a flag pattern over the last few years, as Chris Kimble pointed out, and is close to testing the bottom bound again.

The good news for U.S. equity markets right now is that the High Yield arena has shown no signs of breaking down.  Chris Kimble points out that High Yield has been another good indicator of market directionality, and without a high yield breakdown, it’s unlike the U.S. equity markets would tank.

The S&P is also holding within its trendline bounds for the moment, though it seems to be boxing itself into smaller and smaller trendline confines.  It has a long term (bearish) rising wedge, but within that, it now has a small flag pattern that could break either way in the short term.

It seems like a sensible time to hold a pretty defensive, neutral position until these cross-currents resolve in one direction or the other.

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