US Dollar Pulls Back as Risky Assets Rebound but Bias Remains Bullish

MSCI WORLD STOCK INDEX – Prices have stalled ahead of support at $1120.55 after putting in an Evening Star candlestick formation below resistance at $1135.16, the 50% Fibonacci retracement of the 4/15-5/25 downswing. The bearish implications of the candlestick pattern would only be invalidated on a daily close above the aforementioned Fib, so the bias continued to favor the downside for the time being. A break lower from here exposes $1075.70.

US DOLLAR INDEX – Prices have pulled back a bit after yesterday’s strong rally from support at 81.91, the 8/18 wick low. Overall positioning continues to point toward consolidation, with resistance at 83.38, the 38.2% Fibonacci retracement of the 6/7-8/6 downswing. Longer term, Dollar positioning hints a majorHead and Shoulders bottom has been taking shape since mid-2004, pointing to a structural advance over the coming years. A break above near-term resistance initially exposes the 50% fib at 84.40.

CRUDE OIL –Prices continue to consolidate above horizontal support at $71.09, with near-term resistance lining up at $75.59. This barrier is reinforced by support-turned-resistance at the bottom of a rising channel set from late May, now at $76.69. A firm correlation with stock prices – 0.7 percent on 20-day percent-change studies – suggests the standstill is likely to persist as overall risk sentiment finds its bearings.

GOLD – Prices continue to prove higher toward the $1265.30, but increasingly overt signs of negative RSI divergence warn of a bearish reversal ahead. A break below initial support at the bottom of a rising channel established from the July low (now at $1250.81) exposes the $1243.27 level. Longer term, gold positioning reveals bearish cues with clear negative RSI divergence hinting that a major top may be taking shape. Confirmation of a downward reversal in line with our fundamental outlook requires a weekly close below a rising trend line set from the swing bottom in late 2008, now at $1198.36.

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