Nasdaq holds the way out of indecision

The dollar, gold, bond and equity markets are at critical junctures resulting in indecision among traders and investors. And in the markets the right hand always knows what the left is doing.

Notice that the rally in dollar, gold and equity markets have paused as has the fall in the bond markets. A look at the multiple markets shows that it’s equity markets and more specifically the Nasdaq that is causing the indecision in the markets. So why is Nasdaq key to the other markets finding direction.

Markets always have leaders and laggards. The leaders pull the broad markets up with it in an uptrend and the laggards pull the markets down in a downtrend. When the leaders hit resistance and are unable to rally further, the laggards tend to take over pulling the markets down. Since the week ending November 2008, Nasdaq turned into a leader to the upside. After hitting a low during that week, the Nasdaq did not make a new low. The other indexes such as the S&P 500 and Dow made new lows.

Then in March 2009, laggards — S&P 500 and Dow — hit support and did not fall any lower. The result was the Nasdaq taking over leadership and pulling the markets higher. Now the Nasdaq has hit resistance, which is the 2007 highs, and paused. Unless the Nasdaq is able to clear this resistance level, we can see the equity markets falling. We looked at the Nasdaq 100 index followed by professionals and the resistance level is between 2220 and 2250.

The index closed at 2218 last Friday.

In case the Nasdaq falls from resistance, we will see the dollar index rally. Right now the dollar index has a bullish bias but faces resistance at 80.50. The level has been hit many times, increasing the possibility of a break out, which can take it to the next level of 81.25. A sustained fall in the US equity markets can result in a further rally in the dollar index. A rally in the index will result in a sell off of the rupee and other majors.

As the dollar and equity markets hesitate, so does gold. It has been ranging between 1320 and 1430 for a few weeks with a bullish bias. Despite the indecision in gold, the precious metal has been making higher highs and higher lows, which is a sign that buyers are in control. Usually, gold and dollar move in opposite directions competing for leadership as a store of value. But with uncertainty in the markets both the dollar and gold can rally, which has happened a lot lately. A drop in gold and equity markets will be a double whammy for dollar bulls.

The treasury markets often move in the opposite direction of the equity markets. The 30 year treasury has begun to rally after a pause. This is bad news for the equity markets and therefore positive for the dollar.

When markets are at indecision points it’s important to find catalyst that will trigger a decision. We believe it’s the US equity markets and more specifically the Nasdaq, which can show future direction for the currency, bond and gold markets.

(The writer is editor, www.capturetrends.com, and is based in Chicago)