It looks like we’re setting up for another reflation impulse in the short-term, though with the dollar’s decline solidly broken, the risk trade is on borrowed time.

Here’s a little doodle on a 2-week gold chart:

Source: Interactive Brokers

This chart of GLD shows a longer-term view, where you can see the RSI forming a possible rounded bottom:

Source: Stockcharts.com

In this 5-day chart of SLV, you can see how today’s retest of yesterday’s low in silver occurred on weak volume and with a diverging RSI (also present in gold and the Euro):

Source: Yahoo Finance

Gold’s low so far (February contract) is $1117, down $111 in four trading days. This should be a taste of things to come, since there is a lot of air underneath the parabola that prices traced out. However, downside momentum has slowed to a crawl over the last couple of days, and DSI is showing that traders have gone from wildly bullish to almost neutral, so a bounce from here would make sense and help set things up for another decline. Silver is in the same boat. No doubt many gold bugs see things like Adam over at goldversuspaper, but since everything is tied so closely to the dollar these days, it is hard to see the precious metals mania continuing now the the buck has turned up (and it looks like it has, since it has busted its downtrend on huge volume and held).

In the immediate future, a moderate dip in the dollar wouldn’t surprise me after its two point rise in as many trading days. That said, we appear to have a major trend change on our hands, and traders have been overwhelmingly positioned for reflation, so surprises should be in the direction of a breakout.

Here’s a two-week view of the dollar index. A bit of back-filling into the low/mid-75s would be normal and a nice place to get long again.

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If the dollar does dip here, it would figure for stocks to inch out a new high, or at least crawl along the current highs for a couple more days, though there are huge red flags for the market on anything but the shortest time frames. The VIX and my favorite sentiment indicator, the trailing average equity put:call ratio, are showing relative complacency, though DSI bullishness on stocks is a bit subdued this week. Here you can see that CPCE is not positioned to be kind to stocks over the coming months:

Source: Indexindicators.com

Stocks should break before long just as violently as gold, and with even more downside. Investor Advisory bearishness is at a record low, so it appears that the great dead cat bounce of 2009 has done a splendid job of luring investors back into the market just in time for another round of credit stress. The credit market leads the stock market, and T-bills recently went negative again, as a massive wave of alt-A, option ARM and prime mortgage resets is starting: