Tuesday, October 11, 2011
The S&P 500 bottomed last Tuesday morning at about 1,075. Yesterday, the index closed at 1,195 – an 11% move higher in just one week. If you bought on Tuesday, you've made a year's worth of gains in five trading days. But if you missed the bottom, you may be a bit anxious about getting in.
My advice? Follow the U.S. dollar.
Lately, stocks – and most other assets – have been moving in the opposite direction of the dollar. When the greenback rallies, stocks fall. When the buck declines, stocks tend to rally. So while the dollar pulled back last week, it was no surprise that the stock market rallied at the same time.
But don't rush to buy stocks right now, after such a big one-week move. The dollar rally isn't over yet...
Over the past five weeks, the U.S. Dollar Index has gained 5%. That may not seem like much of a move for a stock... But for a currency, it's huge.
The dollar has gone from near its low for the year to near its high. Most other assets have done just the opposite. Over the past week, other assets have caught a bid while the dollar has pulled back. This action has a lot of folks calling for the resumption of the dollar bear market.
Not so fast. The dollar still has one more move left.
Take a look at this chart of the U.S. Dollar Index...
The chart is forming a potential "bearish rising-wedge" pattern. This pattern normally breaks to the downside and retraces at least 50% of the previous rally. When the dollar finally starts to fall, it should happen fast.
But it's not ready just yet.
Notice the moving average convergence divergence (MACD) indicator at the bottom of the chart. This is a momentum indicator that measures the strength or weakness of a trend. It has been rising with the dollar for the entire move higher. This tells us the trend is strong and likely to continue.
But notice that the MACD indicator is beginning to roll over. On the next move higher for the dollar, the momentum is likely to turn lower. This will create the "negative divergence," a warning sign that often precedes a change in trend.
Also notice how the U.S. Dollar Index has obvious resistance at its early 2011 high point of about 81. One more push higher will prop the index up closer to the resistance level and mark a more reasonable turning point.
Since most asset prices have been trading opposite to the dollar lately, one more push higher for the greenback means gold, oil, and stocks will probably have one more push lower.
Investors will have one more chance to get into stocks ahead of a year-end rally. If you missed the move last week, keep an eye on the dollar. Be ready to buy stocks when the greenback makes one more push up toward resistance at 81.
Best regards and good trading,
When the dollar does fall, Steve Sjuggerud believes it "could lose 5% to 10% of its value." Get Steve's favorite way to play it here: The Next Major Move for the Dollar Starts Now.