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Over the
weekend I had an interesting conversation with a local trader. We typically
meet a few times a year to share our market outlooks, new trading tools and
techniques, and usually finish our session off in a debate about the US
market manipulation and how to trade around it.
Talking about market manipulation
always opens up a can of worms and sparks some interesting theories... And
while everyone has their own views and opinion on this subject I thought I
would briefly share the main points I pulled from our conversation.
I did talk about the dollar index
last week, but the recent price action unfolding today is important so I'm
going to recap on it again.
My Weekend Conversation Key Thoughts:
Point form
thoughts supporting Lower Equity prices and a Higher Dollar:
- Dollar
index looks ready for a major rally (high dollar means lower stocks)
- SP500
may have just formed a double top
- SP500
closed strongly below the 20 day moving average
- First
week of May for the past two years have been intermediate market tops
Points supporting
Higher Equity prices and a Lower Dollar:
- Countries
around the globe are trying to keep their currency value low including
the United States.
- Presidential
cycle strongly favors higher stocks prices which means
the dollar should not rally until Nov.
What do all these points mean? Let's
take a look at the dollar charts below...
4 Hour Dollar Index Chart:
ws us to see all intraday price action while being able
to zoom out several months for patterns along with key support and resistance
levels.
As you can see over the past few
months the dollar has been consolidating sideways. Within this consolidation
it has formed two bullish falling wedges with the most recent one breakout
last week right on queue.
Using this 24 hour futures dollar
index chart we can see where things are trading through the weekend. On
Friday the dollar index closed around the 79.50 level. As you can see the
dollar has surged Sunday night by more than half a penny breaking through its
down trend line.
The next few weeks will continue to
be exciting ones as strong moves in the dollar will create wild movements in
stocks and commodities.
 
Long Term Weekly Dollar Index Chart:
If you zoom WAY OUT using the weekly
chart this shows you the two major areas where the dollar index is likely to
reach come November. Also with these levels are my SP500 price points which
are simply numbers I pulled from the charts using basic analysis. I say this
because I'm not into long term forecasting but rather shorter term price
movements. A lot can change between now and then.
the dollar
index rallies to the 86 - 88 level then I would expect the SP500 to be
trading back down at the 1000 level. If this takes place, the Fed will likely
issue QE3 to jam the dollar back down and boost equities.
The flip side of the coin is that the
dollar rolls over here and gets pulled down. This will boost stock prices in
favor for the president's election. After that the dollar would likely rally
which in turn would put a major top in the stock market, kick starting a bear
market.
The big question...
Do you short the market in
anticipation of rising dollar and falling stock prices? OR do you buck the
trend and stick with the theory of a lower dollar value and presidential
cycle?
The charts above clearly show how we
are entering a major tipping point for the market and the next couple months
are likely going to provide some big price swings for stocks, commodities and
currencies.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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