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U.S. markets are looking to end off the year on a positive note, hitting new closing-highs on Wednesday, as investors remain optimistic about the prospects for equities in 2011. But how much further can this uptrend continue for?
When a market has been moribund for so long, any movement, no matter how small, takes on additional significance. The Dow's rise above 11,600 is a move towards the upper part of a sideways trading range that dominated the markets in 2010.
It is driven by changes in money supply conditions created by the latest round of quantitative easing and some suggest this does not reflect any fundamental change in economic conditions.
The move from the trading band low at 9,600 to 11,600 looks an impressive 20 percent but it hides a generally weaker performance of the market when measured against Asian markets.
The changes in the trend of the U.S. dollar are helping to push commodity prices higher. The impact of this is also seen on the NYMEX oil chart, where prices have broken significantly above the historical resistance of $88 in recent weeks. Tensions in the Korean peninula are expected to add to the upward momentum.
Hong Kong remains the primary entre-port into China and north Asia investments. And for this reason, its market quickly feels the effect of decisions made in Beijing, and the tensions in North Korea.
The sharp sell off in the Hang Seng in reaction to the recent North Korean attack dropped the benchmark index back to retest support near 23,000. This reaction was stronger than the reaction in the South Korean stock markets and reflects the fear of Western market participants rather than the assessment of local investors.
Has the sharp rally in the U.S. dollar come to an end, and what does this mean for gold prices? The answers are essential for traders who are long on one of the two and short on the other. Is this a stop-and-reverse situation, meaning it's time to switch to shorting dollar and longing gold?
The rally in the greenback developed the characteristics of a significant trend change. It moved above long-term downtrend pattern and a new tentative uptrend line was calculated using the pivot point low and a major retreat and rebound point neat $0.78.The Guppy Multiple Moving Average relationships showed the classic trend change signals. The long-term GMMA has compressed and turned upwards.
Resistance was expected near $0.815 and a retreat from this level was expected to find support near $0.795. This is near the value of the new uptrend line and also a historical support level. The drop to $0.79 with the close near $0.795 remains in trend rebound territory with the potential to retest $0.815. The dollar index rally is shaken, but the uptrend has not yet been invalidated.
A mirror of this reaction is seen in the gold chart. A weakening U.S. dollar propels gold higher. The long-term gold trend, as defined by the long term group of averages in the GMMA, remains intact. The price retreat, which mirrored the initial rally in the U.S. dollar, found support inside the long-term GMMA.
In 1962, the Soviets moved nuclear missiles towards Cuba, a few hundred kilometers from the U.S. coastline, and the world held its breath at the provocation.
Fast forward 50 years, a similar development is unfolding: North Korea has moved nuclear armed ships within a few kilometres of its Southern neighbor, which some argue it remains still technically at war with (There was no formal peace treaty to the Korean war, just a ceasefire), and within a short distance of its major ally China. The Korean markets started a slide that sent shivers through world markets. Currencies were the first to react, and the most volatile.
But is it an over-reaction? The weekly chart of the Seoul's benchmark Korea Composite Index (KOSPI) suggests the long term uptrend for the market remains intact. The retreat was exacerbated by the face-off between North and South, but, technically, the retreat was not unexpected. All other issues aside, this is significant because the KOSPI tends to lead the behavior of other regional Asian markets. A continuation of an established trend is bullish. A move below the established trend is bearish, and sends a warning signal to other markets to watch for similar change of trend signals.
The KOSPI chart has three main trend signals.
Global events like heightened Korean tensions and a spreading European debt contagion may have supported the U.S. dollar in recent days, as investors flee risk assets for the safety of the greenback; but the uptrend has already been in place for a few weeks now, ever since the Federal Reserve announced its second round of quantitative easing on November 3.
The reaction is seen as counter intuitive, and, according to technical analysis, shows the reversal from the prolonged downtrend has the potential to develop into a significant trend change.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.