Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Thursday, October 7, 2010

US Dollar Index 10/7/10

Stock Market Technical Analysis

Click on above images to enlarge

Today's market was basically another sideways day on low volume.  There was one event in the currency markets that everyone needs to be aware of.  In the upper cluster, row 3, I reduced the 20 yr bond chart and added a chart of the US dollar index as chart 2.  There are 2 reasons why I am doing this, the first is that it has become widely known that the govt. is going to be stepping into the bond market again and buying bonds in a big way soon, this causes distortion in the bonds inverse relationship to the S&P 500 index.  There will be a lot of speculation going on, manipulation to get better pricing, etc. for a while so the 20 yr bond needs to become the #3 leading indicator of big moves in the S&P 500 and the US dollar index will be the new #2 leading indicator, it also normally works inversely to the S&P 500 index.    The bailout team's continuing pumping of the stock market for the past 4 weeks has actually received considerable backup from foreign investors who rotate back and forth between our dollar & our index ETFs.  Looking at the new US dollar index chart you see that the dollar had a critical breakdown on 9/1 and then again on 9/13 which lead to a steep dollar sell down over the past 3 weeks which caused huge amounts of global investment money to hop over to the US index ETFs to ride their momentum until the dollar index gets down to its lower line of its horizontal mother channel shown with the red line on the chart.  I put a yellow #3 line on the chart on today's trading to emphasize the caution that should be taken since the dollar historically turns back up here.  It is widely anticipated that the US will support the dollar and cause it to start rallying at this level as it normally does.  This will cause global investors to rotate money quickly back out of US stocks and into the US dollar for its ride up.  Granted we all know the US government's official policy is to support a strong dollar while they actually let it fall when it is politically beneficial to do so because in the world market this makes our products cheaper and gives the US an economic boost.  Considering how tenacious the bailout team has been on getting this market higher as we approach midterm elections, we can't rule out the chance of an unprecedented maneuver where they let the dollar fall out of this horizontal trading channel for a little while to juice the short term economic numbers even though it would be very risky for our position in the world currency markets. It seems though that the overwhelming sentiment is that we will have a normal reversal turn up in the dollar which on its own should cause large scale selling in stocks in which the bailout team will have to try to compensate for or we will fall out of the 4 week up channel that is drawn with the thin brown line in the upper cluster, row 1. 

One other notable item is in the lower cluster, row 1 chart 1, you will notice the divergence between the On Balance Volume trend and the S&P index trend (a reminder that the on balance nets out total buying and total selling on a daily basis to give either a positive or negative reading for the day and then plots it ongoing with the blue line as shown).  You can see that from 9/1 thru 9/13 the blue OBV line went up proportionately to the rise in the S&P index.  Since 9/13 though, the blue OBV line has been steadily trending down while the market has continued trending up.  This means that since 9/13 there has been massive unloading of stocks into each and every up move in the index.  This is an extremely bearish divergence that lets us see visually how the masses of investors and institutions are getting out of this market while there are still liquid up moves to do so in belief that the fed will not be able to continue to prop the market. 

The bailout team is really in a conundrum here in that if they step in and support the dollar at this level as the world expects them too,  it could jeopardize their ability to continue to prop the stock market into elections.  This developing scenario will be very closely watched here in the US and globally.