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Monday 12 July 2010

The strong relationship between USD and equities

Just a very quick post today as I am very busy offline.

On ES we still have a possible large rising channel that I posted last week but within it we have a definite smaller rising channel that could carry us up to slightly over 1080 ES today. Support on that channel is just below 1067 ES and a break with confidence below that would open up a retracement that could reach the lower rising trendline and range support at 1048.5 ES :

On EURUSD we have a possible falling wedge, though it is also possible that EURUSD has made a very major top last week. That wouldn't stop this falling wedge playing out however:

I've been considering the state of play on USD very carefully over the weekend and though I don't have time to do a proper write-up on this today, there is a real possibility that USD has bottomed and that a new wave up is beginning. This is complicated by there being two viable alternate support trendlines and the only way to establish for sure which is the right one is to see where USD bottoms this time, assuming that the USD rally is not already over of course. At the moment the higher of the two support trendlines has been hit and USD has bounced:

A lot of people have commented that the inverse relationship between USD and equities has broken down over the last few months and that it is therefore now largely irrelevant. That is entirely wrong IMO, and the relationship is still vitally important. It is just more complex than everyone had thought. Essentially the relationship breaks down into four possible states:

USD in wave up, equities in wave down:

As we were between the equities top in April and the first bottom 180 points below, and also between the January top and the February bottom. The two were in sync and the equities moves down were very fast.

USD in wave down, equities in wave down:

As we were between the first hit of 1040 SPX and the interim low at 1005 SPX. Equities are fighting against the USD wave down and downside progress was slow and broken by numerous strong rallies.

USD in wave down, equities in wave up:

As we were last week, and after between the February low and the April high, with the two back in sync and so fast moves up in equities.

USD in wave up, equities in wave up:.

As we were in December with equities fighting the USD move up and making a little progress up with numerous retracements, and as we may be now if USD has bottomed, and until we make the next equities interim top.

If you break down the equities and USD action over the last seven months since the USD rally started, these four combinations of states describe all of the moves in equities since then. I'll be doing a fuller write-up later this week but that is why USD is still of critical importance here IMO.

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