"The U.S. currency gained against 15 out of 16 of its most- traded counterparts, advancing 0.9 percent against the euro and 0.4 percent versus the yen as of 5:10 p.m. in Tokyo. The euro fell after Standard & Poor’s cut Greece’s credit rating. The MSCI Asia Pacific Index dropped 0.9 percent while futures on the Standard & Poor’s 500 Index lost 0.4 percent. Europe’s Dow Jones Stoxx 600 fell 0.6 percent to 248.92 at 8:10 a.m. in London."
To learn more about trading psychology, and how to use the various technical indicators, try a free e-mail trading course here.Short-term, it would be hard to predict if this morning's moves in both global stocks and the US dollar is the start of a trend reversal or just a short-term blip within the recent trend. For all we know, it could be just a big sideways pattern for both stocks and the US dollar for the next few months, but still a sizeable shift from the no-brainer-dump-the-dollar-buy-anything-else-risky trade that has been dependable for the past few quarters (the sideways scenario would be my personal bias for now... of course I change my mind as the market dictates). For now, I would suggest watching key support of 1,084 for the S&P 500, and key resistance of $77.50 for the dollar index (which is more or less where the dollar is trading at right now). Assuming that the inverse relationship between stocks and the dollar hold, a sustained move by the dollar above this resistance level could portend weakness for stocks in the short-term.
Looking at it from the fundamental standpoint, I've written a few posts regarding a potential end to the inverse correlation between stocks and the dollar as both the prospects of an improving economy and a rate hike scenario creeps in (check out "US Dollar Rallies; Should Equity Investors Be Worried?" and "Prior Rate Hike Cycles And Their Effect On the Stock Market"). To tie things up, my logic behind all this is that the current rally in stocks is fueled by liquidity, which is in turn partly or even mostly fueled by a weak dollar (thus the dollar carry trade). This is why most bearish pundits are calling for a market crash (possibly testing the March 2009 lows) as the current rally can be considered speculative in nature. But don't forget the fact that we are seeing some improvement in economic numbers, from jobs to industrial production to housing figures... and because of this some analysts are calling for a rate hike by the Fed sooner than later. For now, dollar strength can lead to a correction in equities, thus wiping out those speculating on the dollar carry trade to buy risky assets. This could open the door for the stronger hands, those who see a true economic recovery, to come in and buy stocks on the dip.
This scenario could in turn eventually lead to strength in both the stocks and the dollar, or maybe the dollar not being such a big deal to stock market performance anymore, breaking the monotony of the past few quarters. As I said in my previous post, this development might be the signal that there are no false starts to both the stock market and economic recovery. I'm just throwing this scenario out there in case it materializes, but I am in no way guaranteeing it, nor am I trying to precise predict when this will happen. But this seems to be the most logical scenario given what the stock market has done over the past few quarters, the economic data that has come out, and the recent strength in the US dollar. It is always handy to have an analysis of the bigger picture, which allows me to trade comfortably amid all the noise.
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FD: No personal position
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