Analyzing The Current Reversal In The Markets

There’s been an increasing amount of talk lately that the US stock market market is gearing up for a rally, and that we’re set to see a reversal of the market trends that have dominated the last few months of trading. Let’s take a look at key signs of a reversal and corresponding trading opportunities.

1. Gold is rallying and is currently at an eight week high. GLD (GLD), an ETF that tracks gold, also appears to be rallying, as it is making higher highs and is testing key resistance at 81.72. A break above this level could provide momentum traders with the confirmation they are looking for.

2. Likewise in the forex market, we see EUR/USD reaching breaking past key resistance at 1.3250, and USD/JPY breaking below 92.00. A break below 91.00 may be a great opportunity for USD/JPY traders looking to trade the longer-term trend to 85.00. For stock market traders, the CurrencyShares Japanese Yen Trust ETF (FXY) may be of interest in capitalizing on this.

The Bigger Picture

If the rally is sustained, I would view it as a resumption of longer-term trends in the dollar and gold (weak dollar, rising gold), but a counter-trend correction in the US stock market (whose longer term trends is bearish in my opinion). In terms of gauging the overall health of the US economy, I would look to measure any gains in the US stock market in comparison to losses against the US dollar; if the stock market is rising but the dollar is falling, it may suggest an increase in nominal, but not in real value.

Disclosure: I am long gold and USD/JPY.

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