US DOLLAR SURGES AGAINST ALL CURRENCIES -- THAT'S USUALLY BAD FOR STOCKS AND COMMODITIES WHICH TREND IN THE OPPOSITE DIRECTION OF THE DOLLAR -- S&P 500 BOUNCES OFF SHORT-TERM SUPPORT LINE BUT REMAINS IN DOWNTREND
US DOLLAR INDEXES SURGES TO SIX-WEEK HIGH ... Besides today's selling in stocks, the most notable feature of the day's trading was the 1.74% surge in the U.S. Dollar Index. Chart 1 shows the Bullish Dollar ETF (UUP) surging to the highest level since mid-July on rising volume. That puts the UUP well above its (blue) 50-day average and in position to move up to challenge its spring/summer highs and its (red) 200-day moving average. Today's action doesn't change the dollar's main trend which is still down. But it could push the dollar to the upper end of its trading range that started at the start of May. Virtually every foreign currency fell against the greenback today. Chart 2 shows the Currency Shares Euro Trust (FXE) tumbling more than 2% on rising volume. The FXE is now threatening its July low and its 200-day moving average. The Swiss Franc Trust (FXF) tumbled more than 8% on rising volume after that central bank announced "unlimited" buying of other currencies to prevent the Swiss franc from rallying any further. Apparently, the only currency that got bought today was the U.S. Dollar. Unfortunately, that's not good news for the stock market which has been trending in the opposite direction of the U.S. currency.
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Chart 1
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Chart 2
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Chart 3
BOUNCING DOLLAR RAISES RISK FOR STOCKS... One of the "new normal" intermarket relationships of the past few years has been the tendency of the dollar and stocks to trend in opposite directions. Chart 4 shows that inverse correlation over the last three years. Except for the spring of 2010, the 50-week correlation coefficient (below chart) has been in negative territory. The two main points of interest on Chart 4 are the top in the UUP in the spring of 2009 (first green arrow) which coincided with a stock market bottom, and the dollar bottom this April (green up arrow) which coincided with a peak in stocks. Since the start of July, the green line has stayed flat while the S&P 500 has tumbled which has caused their negative correlation to weaken a bit. Today's dollar rise puts the two markets back in sync again -- a rising dollar and falling stocks. A bouncing dollar is also potentially bad for most commodities which have a strong inverse correlation to the greenback.
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Chart 4
S&P 500 BOUNCES OFF LOWER CHANNEL LINE... The hourly bars in Chart 5 show the S&P 500 bouncing off the lower channel line drawn under the last month's lows. That support line helped prevent a bigger breakdown. The two parallel green lines, however, show a "rising channel" formation which, in the context of a larger downtrend, is usually a bearish continuation pattern. While today's bounce prevented any further damage, technical odds still favor an eventual break of the lower support line and resumption of the larger downtrend.
