Wednesday, February 10, 2010

Some Late Thoughts on the US Dollar, Stock Market

The fact that the stock market has not declined quickly in a wave iii of (iii) has not sat well with me, especially after today. Although the light volume may explain the delay, and there is certainly plenty of bearish indicators in play, I'm not satisfied sitting on a fat short position with a wide stop at this time. Now is a time to control risk a little bit more. In taking a look at the US Dollar this afternoon I'd like to point some things out. Notice in the above daily EUR/USD chart (the EUR/USD moves almost opposite the US Dollar) that so far the pair has declined in only 3 waves, which is a correction. Now this should just morph into a 5 wave decline, which I do think it will, but I don't want to get caught blindly bearish and overleveraged to the downside this late in the game. The way I see it, as long as the EUR/USD trades beneath 1.4579 then the large downtrend remains intact. A break above that level before completing a 5 wave drop would make the entire decline from 1.5143 a 3 wave drop, and therefore a correction, which means a rally to above 1.5143 would be inevitable. But as long as it trades beneath 1.4579, then I remain very bearish this pair, and very bullish the US dollar in the medium-to-long term. This is of particular importance to my equity stance because if the dollar ends up heading to new highs, the stock market will most likely be surging higher as well. This is nothing I'm panicking about, it's just something I want to put on the radar for us to watch.

Above is a 35 minute chart of the EUR/USD. You can see that I circled what might turn out to be a 3 wave decline, which is a correction. If the pair rallies above 1.3813, then it will confirm that it did in fact decline in 3 waves, and that it's almost assured it will also charge higher above 1.3840. From there, we'll have to see the structure to determine how much more euro strength and dollar weakness will occur. But the short term picture is looking bullish for the euro, and bearish for the dollar, which is in a bit of a contrast to what I've been expecting; much like the stock market not behaving properly.

Lastly, I want to post my 1 hour AUD/USD chart which shows a large 5 wave rally against the US dollar. This is very concerning for short term dollar bulls, as this large AUD 5 wave rally against the US dollar indicates that the larger trend is now up for the AUD, and judging by the size of this rally, after a correction it's going to remain in an uptrend for quite a few days. Now contrary to this are the other majors like the GBP/USD and the EUR/USD which do not have 5 wave advances, and the GBP/USD is lagging severely. So the US dollar remains strong there, so it's not all bad for the US dollar; but the AUD rallying in 5 waves against the US dollar is definitely something to watch. Is it leading the other pairs higher against the dollar, or is it just an anomaly that means nothing? I have no position in the dollar right now so I can comfortably just sit back and wait and see. I'm just watching it vigilantly to see if I see a good trading opportunity, and also because I know that any big moves in the US dollar will also affect the stock market.

In summary, I wanted to post this tonight to put my recent analysis into perspective as it's applied to real world trading. To be clear, I'm still short term bearish the stock market and bullish the US dollar. However there are some factors occurring contrary to these views that I don't want to ignore. It means that if I don't want to be too risky then I may want to only get short the S&P if it breaks below 1057; or if I want moderate risk I may want to be short right now and only risk what I'm comfortably willing to lose with a stop just above 1105. And as for the dollar picture, my sell stop on the GBP/USD remains the same at 1.5555 until I get a better signal that a top is in to where I may short at a higher level.

The moral of this post is that I'm bearish in the short term, but I'm not going to get overly aggressive until at least 1057 in the S&P is broken, and I'm not getting overly bearish the dollar pairs until the GBP/USD breaks beneath 1.5555.

Okay, enough rambling, good night!


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