The Inverse Dollar Relationship, SPX and Fear

By: Chris Vermeulen | Wed, Dec 15, 2010
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So far this week we have been seeing fear creep in the equities market. This Wednesday we started to see fear (green indicator) reach a level which tells me to start looking for the market to bottoming. I do follow a few other charts and indicators which warn me of a possible trend reversal (high probability setup) before it takes place but the US Dollar and selling volume are key.

As we all know, when the market is trying to top and roll over it tends to be more of a process than a couple day event. It's this lengthy topping process which has a lot of choppy price action which sucks traders into a position much too early or shakes you out of the position before the market does what you anticipated.

On the flip side, bottoming is more of an event because it tends to happen after a strong wave of panic selling. Fear is the most powerful force in the market (other than the Fed/Manipulators... but that's another topic). That being said, when you know what to look for in bottoms you can generally see the market starting to bottom and prepare for it.

The charts below of the US Dollar Index and the SPY clearly show the inverse relationship they have. Right now it seems everything is directly connected with the dollar... it has been like that for most if the year... I will note that its not normally this clear. Anyways, the dollar is currently trading at resistance which means there is a good chance it will turn back down. So if the dollar drops, then it should boost the SPY (equities market) and put in a bottom for stocks.

S&P500 and US Dollar

Looking at the lower chart of the SPY etf you can see that recent prices have dropped down to a support zone. The important thing to note here is how selling volume is ramping up. This to me means more traders are getting worried and are cutting their losses or locking in gains before it gets worse. We typically see panic selling enter the market near the end of pullbacks. Just like in a bull market where the retail trader (John Doe) is the last to buy before the market falls, it's the same but flipped in a down trend. The retail trader is the last to panic and sell out of their position before the market bounces/rallies.

Currently the equities market looks to be showing signs that a bottom is nearing. Over the next session or two the rest of this equation should come to light as a tradable bottom or to start playing the down side of the market, only time will tell...

 


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Chris Vermeulen

Author: Chris Vermeulen

Chris Vermeulen
President of AlgoTrades Systems
www.TheGoldAndOilGuy.com

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Chris Vermeulen

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized market technical analyst and trader. Involved in the markets since 1997.

Chris' mission is to help his clients boost their investment performance while reducing market exposure and portfolio volatility.

Chris is also the founder of TheGoldAndOilGuy.com, a financial education and investment newsletter service. Chris is responsible for market research and trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors around the world. He designed an automated algorithmic trading system for the S&P 500 index which solves his client's biggest problem related to investing in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades' automated trading systems allows individuals to investing using either exchange traded funds or the ES mini futures contracts. It is supported by many leading brokerage firms including:

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He is the author of the popular book "Technical Trading Mastery - 7 Steps To Win With Logic." He has also been featured on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and dozens of other financial websites. His list of personal and professional relationships approaches 25,000, people with whom he connects and shares is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations management.

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight pilots license. He resides in the Toronto area with his wife Kristen and two children.

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