The Strong Relationship between USD and Equities (by Springheel Jack)

By -

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 :

100712_ES_Rising_Channels

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:

100712_EURUSD_Falling_Wedge

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:

100712_USD_BA_Wedge

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.

Share this post: