Plausible Scenario for 2010

The US markets fell. The RSI on the S&P has closed below 50 after a long time. If we break below yesterdays low we could be on the verge of triggering a SELL in the S&P. Coincidentally DXY has already triggered a BUY on the basis of this RSI system. Also the trends have changed in most indices. HSI, HSCEI have become SELLs while Gold, Silver, FTSE and S&P will become SELLs if they break below their lows made yesterday.

I am a trend follower but that does not mean that I do not think. As my readers know from my notes in the past, I have a window overlooking a lake and I have a habit of staring out of the window in deep thought. One of my thoughts in the recent past has been that the weakness in the Dollar is due to an oversupply of Dollars caused by an expansion of the Fed balance sheet. (Wow I cannot believe I wrote this line). Therefore it follows that the only way the Dollar can reverse its weakness is if the Fed shrinks its balance sheet. This can happen only if there is an US economic recovery forcing the Fed to increase interest rates.

Now that I have thought of all this why not look at the consequences of this?. Most definitely the currencies that have rallied like the AUD New Zealand dollar etc will take the brunt of the Dollar strengthening. Also commodities which have been the largest beneficiaries of the Dollar weakness should be one of the most hit. And finally, Gold which was the largest beneficiary (check out a chart of Gold vs any other commodity) will also be hit the most.

Equities will get hit, which is a paradox because I am saying that equities can come down despite an improvement in the economic activity. But they should definitely get hit less than the commodities. Material stocks could get hit more than others. Emerging market stocks should get hit more than US stocks.

Can you beat this? I sound like a good strategist. I have painted a picture of the coming year which is very plausible. In fact if my job was to write strategy reports I would probably have published this. Of course one would have needed to embellish this simple text with lot of charts but then what are assistants for?. We could have thrown in a few tables too just for effect. Unfortunately I am a trend follower and therefore will continue to run positions according to my definition of the trend. Currently I am short Nifty on the basis of an hourly chart reading of the trend. Will add to my short position below 5010. Will cut my short and go long if Nifty trades above 5200.