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Thursday, 21 October 2010

The US Dollar and Equities

I've been watching the US Dollar carefully for weeks, predicting a bounce or major reversal at the lower triangle trendline. I've been watching /DX, which is generally a very good proxy for USD, and hasn't diverged much in the past when I've been watching it. I was therefore surprised to see yesterday on $USD that my target trendline for a reversal had already been hit. Here's how that looks on the weekly $USD chart:

The triangle target is in the 86.5 to 87 area but there is another target to consider as well. On the $USD daily chart I have a perfect declining channel and the lower trendline was hit at the same time as the triangle lower trendline.The target for the upper trendline of that declining channel is in the 80 area. Here it is on the $USD daily chart:

Now it's hard to be a USD bull at the moment. There's a lynch mob baying for the dollar's blood and it's led by the guardians of the currency at the Fed. That's not an ideal situation and the triangle may well break downwards. It is definitely something to bear in mind though and you can see the importance of USD to equities from the second chart where I've divided the USD waves to show the complex correlation with equities. These divide into four possible states as follows:

USD in wave up, equities in wave down:

As we were between the equities top in April and the first bottom 180 points below in early June, 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 from the end of August to the middle of October, and 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.

So where does that leave us this morning? Well it may not say anything useful this morning at all. We could go on to hit the $USD declining channel lower trendline again shortly and I have a reasonable looking IHS on EURUSD that has an immediate target at a new high of 1.425:

We may therefore also hit my triangle lower trendline on /DX if this continues to play out. That target is at 75.75 of course. GBPUSD is pulling in the opposite direction to EURUSD this morning though EURUSD strength may carry it up regardless:

That's not what I'm expecting to see today however. On balance I'm expecting EURUSD to reverse and for USD to have a good day while equities have a bad one. Everything looks ripe for an equities fall today if resistance just overhead holds. If that resistance breaks though,  then I have an immediate target of 1200 on ES that I'd expect to see hit today or tomorrow. My line in the sand for seeing that is a new high on ES at 1182.5. If w're going down then a break of 1173 will open up an immediate target of 1165 and if that breaks then we could well see a drop to 1140.

This finely balanced situation is nicely summarised by the ES 60min chart, where you'll note the nicely formed IHS indicating to 1200. The rising blue trendline is short term support at 1173, the 1165 target is at the higher declining red trendline, and the 1140 target is at the lower declining red trendline:

There is a matching situation on Dow, with resistance at 11,100 and a descending triangle indicating to 11,335 if that resistance is broken with confidence. This should break one way or the other early today so one way or the other it looks like today should be interesting.

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