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The SP500 is nearly back to the breakdown point of 1294.26 and if it fails to make it over, this will have been a prime opportunity to sell.  If you’ve sold nothing, you may at least want to sell something into this rally. If you believe all the worries are irrelevant, that the war with Libya will be short, that the US dollar will crash through the 2009 low definitively (it hasn’t yet, but has broken down as I type; will it recover by the close is the question), or that gold is going to new highs before correcting more, then you should sell none of your stocks, buy gold (GLD,IAU are possible gold ETF choices) and short the US dollar.

But if you believe some of the opposite, you may want to lighten up on stocks, gold and go long the US dollar (the latter for traders only; the US dollar is not a long term hold!  And please read my prior comments on gold on this site.  I hold my core position and trade around it.).  For most Americans, going long the US dollar means doing nothing, but some may use an ETF to invest or trade various currency combinations for the FX crowd.  But those who are overweight stocks and gold, may want to trim a bit now or based on where stocks, gold and the US dollar index end up at the close if you prefer.  We need a close of the US dollar index above the 2009 low today for a turn in these markets to stick.

Will all three markets turn here? It does not matter.  We follow the signals.  Attempting to forecast the news flow is futile.  Even if you had a good guess at the news flow, you probably would not have anticipated the yen attack (governments driving it down in value vs. the US dollar and Euro etc.) in time to profit from it – that is from the news alone.  On the other hand, if you were trading based on the fact that the yen was being pushed too far upward against the US dollar to allow the Japanese to recover, that would have been a reasonable way to predict a shift in trend.  It is simply that trends revert to their means eventually.  Markets that are too stretched either go sideways for long periods of time or they go down.  Sometimes they go down, recover and go sideways for a long time as Walmart has done for a long, long time and as the drug index has done for a long time.

A close back above 1294.26 will be the first signal in repairing the SP500 Index.

UPDATE 3-22-2011 @ 2:53 pm: “It MISSED by just that much…  Sorry about that chief.”  Maxwell Smart   The SP500 index has failed to hold above the 1294.26 level and also failed to take out the 50 day moving average. These sorts of bounces up to resistance are common in corrections.  Now the correction will resume provided that we remain on a closing basis below that 1294.26 point.  If you want to see the support levels below here, simply subscribe below to my free newsletter.

UPDATE for 3-22-2011 @ 4 pm ET Close: The SP500 Index closed at 1293.77 just a hair below the critical breakout point of 1294.26.  That could be considered as too close to call, even though it is just below the support level.  Sometimes the market tests below a support level after moving up through it as a test of support and then moves up through the same point another time.  My bias is that we go down from here and that the stocks down, gold down, and US dollar up scenario is going to kick in soon. The US Dollar part of that has not yet kicked in with the US dollar index currently up only fractionally from yesterday at 75.44 as I type this.  I would still favor a rebound in the US dollar and a decline in stocks (modest perhaps, meaning a correction of up to 10%, not a disaster).  It will be a buying opportunity in gold and stocks when it runs its course.  (read my separate gold post update as well)

Enjoy your day in the US, Russia, China, Netherlands, Ukraine, Spain, Germany, Canada, Australia,Great Britain, Latin America, or elsewhere (tell more people about it elsewhere to make the top 11 countries/continents!) Dave

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© 2011 David B. Durand, M.D. All rights reserved.