Saturday, March 29, 2014

MTU Weekend Ed. - Monthly Outlook Update (3/28/14)

Stocks, bonds, USD, gold

Stocks are likely to wrap up a month-long pullback (Chart 1) before a potential final upswing towards our “timed top” (Chart 2). Over the month, SP500, SP400 and Transports made all-time highs, unconfirmed by other indexes. A swift and strong upswing over the next two to three weeks would nicely achieve the “timed top”.

The benchmark 10Y US Treasury yield has been consolidating in a potential bearish flag/triangle over the past month. A rally towards lower yields looks likely, perhaps to fill the gap around 2.3% on the 10Y as indicated in Chart 3.

Last month, we observed that

(a) If the USD index rebounds from current levels, near term upside potential points to the 82-83 area before running into some long term resistance.

(b) At the same time, a potential head-and-shoulders pattern is emerging which points to a drop toward the 73 area if it materializes. A failed HS attempt likely introduces upside breakout potential for the USD index with respect to its long term resistance.

These observations remain the same. Moreover, the potential bearish head-and-shoulders pattern appears to be failing (Chart 4). An upswing to 82 or higher on the USD index appears likely.

Gold priced in USD is now retesting prior resistance after breaking out earlier (Chart 5). Gold priced in JPY and EUR continue to show upside potential (Chart 6 and Chart 7), as discussed before. For the near term, a $100 drop in March, a 50% retrace and a potential bullish wedge (Chart 8) likely present an opportunity from a risk-reward perspective. Naturally, it’s important to adopt a stop at the 2013 low and risk-based position sizing.