Things always look better in the Spring

A Little 'Head 'N Shoulders' Anyone?

With all the negative news floating about these days, a bit of springlike fresh air might be just what we need before we have to put the surgical masks back on. I have seen a couple of things in the market lining up and it bears mentioning. (Jerry hasn't gotten back to me about the Detroit 'flight of fancy' I earlier wrote about, and besides, with MSU going to the BIG dance on Monday IN Detroit, it is only proper for me not to detract from the celebration. Go Spartans!)

We seem to be following a global path to zero interest rates. Low interest rates provide impetus for corporates to make capital improvements or expansion or acquisition. That is, once the lack of lending by banks has been corrected. Gold is approaching the low end of its channel and slipping through that point could produce a 100 point correction down in the low 800's. Hedge fund investing for some reason has a couple black eyes . . . . BUT there is an interesting chart formation going on in the equity markets that could signal an up move despite the rise unemployment tide and credit debacle.

An inverse head and shoulders formation on the daily S & P 500 Futures Index is suggesting we can go higher in the stock market, In plain English, there is a study tool for analyzing markets called bar charting, that takes the high , low, and settlement prices and graphs them over a time horizon. As markets cumulatively express the balance of greed and fear in human nature, chart formations tend to form with some predictability. When a 'head and shoulders' occur in bull markets. the market often heads down. In markets where this pattern occurs upside down (or inversely), it signals an up move. In a related market occurrence, the currency options markets have been active.

There is large open interest in puts in Japanese Yen, Swiss Franc, and the Euro marked to the September expiration. Long 'puts' means the value of where the three currencies mentioned will be significantly lower by September than they are today. When an investor sells one currency to buy another, the newly purchased currency is put to work in instruments denominated in that currency. (You buy US Treasury Bills with US Dollars. You buy real estate in the U.S. in US Dollars,etc.) Futures contracts in the U.S. are marked to market in US Dollars. The result will be to take advantage of weakness in those currencies to realize a gain in US Dollars. There is a shortage of 'external' dollars in the market right now. Banks aren't lending, people aren't spending, and the shortage will increase demand if reasons emerge for a dollar demand. We may be seeing the reason (the head and shoulders in the stock market index and the flatline interest rates). Time will tell. In the meantime, enjoy the breath of fresh air.

Contributed by TC- Futures Trader, Part-Time Economist, and Futurist