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In the late afternoon word came down that a run on Greek banks is underway. While the ECB claims there is a firewall around Greek banks, viruses have a nasty way of penetrating firewalls. At this point in time it is unclear as to which banks are exposed to European debt and how far things could spread. We know that MF Global made some bad bets on Europe and now JP Morgan is being investigated for trading losses. While we don’t know exactly what led to JPM’s trading losses, there’s a good chance it involved European debt.

It also looks like the really bad news may just be starting. Greece could not form a government and will require a new election in June. A run on Spanish and Italian banks could start at anytime if the citizens of those countries start to panic because of what is happening in Greece.

The U.S. Dollar has been on a rip and has broken through both short and longer term downtrend resistance. While there are horizontal resistance points at 82, 83 and 86, the multi-year downtrend resistance stands at just under 88. If the dollar were to surge that high the S&P would probably drop to about 1000. The question is will Ben Bernanke allow that to happen.

Since this is an election year the incumbents will probably do everything in their power to prop up the markets. It’s unclear at what point the Fed will step in with further easing but I doubt they will allow the markets to drop that far before the election.

Gold as evidenced by the chart of GLD may be approaching a double bottom. GLD is almost at the December, 2011 low and I would think that traders are waiting for it to get there before hopping in. While there will probably be some sort of bounce off that level, it is unclear if it will just be a blip in a larger downtrend of if a new rally will start.

Oil as evidenced by the chart of WTIC may also be approaching a double bottom. Oil broke down from a rising head and shoulders pattern and the pattern looks like it is near completion. An interesting scenario would be if the Fed announces a new round of QE just as the S&P, Gold and Oil hit their projected downside targets.

Conclusion: It looks like the stock market is heading lower. At some point the Fed and ECB will probably step in with further QE.

We can see that the VIX hit resistance at it’s 200 day EMA of 21.64. This also corresponds to the neckline of the pattern. There are negative divergences forming which indicate that the VIX should drop. The VIX hit a higher high between April and May but the MACD and stochastics hit a lower high. The MACD momentum bars were much stronger in the initial run up that started in April but the bars in the current cycle are much weaker. The RSI is also decreasing.

This would indicate that the VIX is going to pull back. It could pull back to it’s uptrend line and then create another right shoulder or it could drop through the uptrend line and negate the pattern. In any event the market should move up from here. If the VIX were to negate the pattern the S&P 500 and other market indices would in all likelihood resume their uptrends.

The SPY daily chart confirms the VIX chart as there are positive divergences indicating the SPY should head higher. The SPY hit a lower low between April and May but the MACD negative momentum bars are weaker in the current cycle indicating that negative momentum is waning. The RSI is at the same level that it was in April when the market rallied and the stochastics are oversold.

The SPY weekly chart still looks bullish. The SPY has pulled back to it’s 20 day EMA where it has found support. This level orresponds to the 2011 market top which is also acting as support. The RSI and stochastics are still above 50. The MACD has given a sell signal but if the rally continues that should quickly reverse. As long as the RSI and stochastics turn around above 50 the rally should continue.

There are numerous wildcards in play that could influence the market direction.

1) Good or bad news out of Europe and China.
2) The announcement of QE3 by the Fed or ECB.
3) Natural or man made disasters.

The stochastic on this chart is extremely oversold and is the most oversold it has been since 2010. Each time the stochastic hit this level of oversold a substantial rally has ensued. The RSI is at the level it was in January, 2012 when Gold staged a nice rally to the top of the consolidation pattern
If we look at the daily chart of Gold, we can see that it is culminating in a descending wedge pattern. Typically these patterns break out to the upside. The RSI is extremely oversold and is at the level it was in Janury, 2012 when a rally ensued. The stochastic is also at the level it was at other times subsequent to that when some type of uptrend ensued.

Sentiment on Gold is extremely bearish. One commentator on CNBC said Gold was heading to $700. per ounce. The talking heads are questioning as to whether the bull market in Gold is over. Even long term bulls are getting discouraged and predicting lower prices in Gold. These type of events generally mark a bottom in the underlying asset.

Conclusion: The technical parameters are pointing to either a temporary or final bottom in Gold with a rally to at least 1700 looking like it is in the cards. If Gold makes it that high it will have to be seen as to whether it can break through the upper downtrend line. If Gold fails to hold support at 1580. then the upward consolidation will have failed and much lower prices for Gold could be seen.

Bearish sentiment on gold and miners is now unwinding and should provide fuel for this rally. The fact that oil has broken down from a flag formation is another positive sign as lower oil prices are positive for miners.

Oil has sold off because the U.S. and Europe have stated that they may tap into their strategic oil reserves in an attempt to keep oil prices down. This is a band aid approach that may help in the short term but in the long run it will not have a major effect on the price of oil. Oil is going up in the longer term but it may take a quick drop to it’s 200 day EMA at 98. Then again this could be a false break down and when the news wears off oil will be back in the 105-110 trading range.

I mentioned in my entry of March 24 that TLT bonds were having a counter trend rally and would hit resistance at the 115-116 area. Well TLT didn’t make it that far as it got hammered at 114. Friday’s action formed a bearish outside candlestick that encompassed the prior 3.5 days worth of gains. TLT may find some short term support at it’s 200 day EMA of 111.01 and the March 19th low of just under 110. but this looks like a broken trade. There is longer term uptrend support at about 95 and that is where TLT looks like it is headed.

My guess is that the 30 year bull market in treasury bonds is officially over. One way to play rising interest rates would be to buy TBT. While there can be pricing problems with double inverse ETF’s this particular one has formed a rounding bottom and with interest rates coming off almost 0 it looks like the only direction this ETF can go from here is up.

The dollar has not been exhibiting any great strength lately as many analysts had been anticipating. The Euro has in fact been slowly rising as the perception is that Europe has at least temporarily solved it’s debt crisis while the U.S. has a potentially larger one looming in the future. There are countries like Russia, China, India and Brazil that are actively working to undermine the dollar as the universl currency of exchange.

If a sovereign debt crisis were to hit the U.S. it seems unlikely that the dollar and treasuries would be the main beneficiaries of it as the entire fiscal system of the U.S would be under fire. I would anticipate that gold, silver and other hard commodities would be the primary asset classes that capital would flow into.

Conclusion: It looks like the rally in gold, silver and miners is underway. In any event some gold and silver should be a long term holding in any portfolio.

There was a breakdown of the rising head and shoulders pattern on GDX and the downside target of approximately 48 has been fulfilled. The minimum upside target of this run should be to the 200 day EMA at the 55-56 area. What happens past that point will depend upon the price action of oil and gold.

One way to play the rally in miners would be to buy Yamana Gold (AUY) either the stock or options. AUY has pulled back to the bottom of it’s well defined uptrend channel. The next move up should take it to the top of the channel at about 18.50.

Rising gold prices are good for miners but rising oil prices are not as they eat into the cost of production. Of course if the price of gold increases faster then the price of oil or the price of oil drops the 2 factors can negate themselves. Right now it appears that the price of both oil and gold are on the rise.

As I mentioned in my entry of February 22 GLD had broken through the neckline of an inverse head and shoulders pattern. That quickly reversed as JP Morgan apparently dumped a huge amount of gold on the open market. Any attempt at manipulation of the precious metals markets is doomed to failure as the laws of supply and demand will eventually win out. Central banks around the world are loading up on gold and China is an especially heavy buyer. China will be opening up it’s own gold exchange in June and the government is encouraging it’s citizens to load up on gold.

As a result of JPM’s actions there is an even larger inverse head and shoulders pattern forming on GLD. We have a left shoulder and head and the right shoulder is now forming off the 50 day EMA support line. If the pattern were to complete a successful break out of the neckline would bring gold to $2,100 per oz. With China opening up a gold exchange combined with the fact that Hong Kong will be opening up a silver exchange it seems highly likely that both gold and siver will be hitting new all time highs this year.

WTIC Oil has also formed an inverse head and shoulders pattern as evidenced by the monthly chart. The neckline has already been broken and the projected price target is 125.

Oil has been flagging since February as evidenced by the daily charts. Once oil breaks through the top of the flag formation it should make a quick run to 125.

As I also mentioned in my entry of February 22 bonds were in the process of breaking down but were taking quite some time to do so. Bonds as evidenced by TLT finally broke through critical support this past week and are now staging a counter trend relief rally. I expect TLT to hit stiff resistance at the downtrend of 116 or it’s 50 day EMA at 115.42. From that point on TLT should head lower and the stock market should continue to rally.

As far as the broader market is concerned the charts are indicating that we are in a powerful bull market.

The QQQ has been leading the market higher. Towards the end of 2010 the QQQ broke through the neckline of an inverse head and shoulders pattern with the neckline at $50. and a price target of $75. For all of 2011 the index swung between $50. and $60. In 2012 the index broke through the $60. level indicating that the market is poised to move higher.

The S&P 500 broke through it’s bear market downtrend from the 2007 market top and it is now trading in the upper half of it’s uptrend channel. A breakthrough of the midline generally leads to a run to the top of the channel. In the current time frame the upper trend line crosses at about 1500.

20 year treasury bonds as evidenced by TLT are in the process of breaking down. The breakdown has been taking awhile due to the lingering effects of the Eurozone crisis but it is now almost complete. TLT has formed a head and shoulders pattern with 4 right shoulders that are descending. The RSI is below 50 and the MACD has been steadily dropping and is below 0. Critical support is at $115.

The index is currently just below it’s 10 day EMA where it will in all likelihood find strong resistance. A drop below $115. should quickly bring TLT to it’s 200 day EMA at $110. This drop should coincide with another leg up in the stock market as the S&P is testing overhead resistance at about 1370. Since interest rates move inversely to the underlying security, it makes sense that interest rates should rise along with the improving economy.

Conclusion: If the market does make a run for 1455 there is a good chance it will get there by the end of April. By then we should have a better grasp of the global economy and whether problems in Europe and potential problems in China will affect the U.S. economy in a negative way.

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