Dollar and the Dow Positions

Apr 27, 2008: 10:40 AM CST

Let’s look at the price positions of the US Dollar Index and the Dow Jones Index to gather clues about possible moves next week:

First, the Dollar:

The Dollar Index rallied (strengthened) last week, after forming a tight coil and has broken above its key 20 period moving average. Price is finding preliminary resistance at the falling 50 period average, but an ‘oversold’ bounce was highly likely.

The trend has not changed, which is obvious from the weekly chart, and until proven otherwise, the index remains in a downtrend.

Nevertheless, a stronger dollar should be bearish for commodity prices which could be good for the market.

Speaking of the Market, let’s look at the Dow Jones Index:

I’ve drawn three lines on the chart.

First is the resistance line at 12,800 and support line at 12,200 which also form a parallel trend channel that has bound price virtually throughout all of 2008.

Price is now testing and breaking above the upper trend channel line (this upper line actually goes back further as a horizontal line, and the 12,800 level is quite significant).

The third line I have drawn is a rising trend channel which began in mid-March which has now met the upper resistance channel and formed a sort of ascending triangle from which price is now breaking upwards as well.

IF (and that is a big ‘if’) the triangle pattern is an actual pattern that meets its upside target, price could reach 13,800 based on the distance from the height of the triangle (just over 1,000 points) added to the breakout price. That seems far-fetched to me, but that is the implication of the pattern resolving.

Also, notice that there is potential overhead resistance via the falling 200 period moving average.

A ‘flat-line momentum divergence’ also has developed as price has inched its way higher. As price made newer relative highs, the momentum oscillator did not confirm these new prices but instead made almost equal swing highs, which set up a non-confirmation.

By the way, all the chart analysis we do could be validated (with an upside break) or disconfirmed when the Fed announces monetary policy early next week. In fact, the market could have been increasing over the last few weeks in anticipating of another cut or positive mention from Bernanke.

Check out or Join the Market Club for more analysis, scans, and signals as well as deeper analysis for the upcoming week. I’ll be updating more this week on candidates or commentary from Adam Hewison there.

Be careful next week if you’re a newer trader and don’t understand how the Fed can move markets suddenly.

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Potash Continues to Impress

Apr 26, 2008: 4:47 PM CST

Potash (POT) is a stock I have been following for over a year now, and it has continued to be an impressive stock that has treated its investors phenomenally. What happened last week and why was it important?

Potash beat earnings expectations by $0.22 last week, and increased its outlook for the future.

“The world’s largest fertilizer company by capacity, Potash Corp. produces the three primary plant nutrients. It is No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.”

With those two factors behind it (exceeded estimates and raised guidance) you would think the stock would surge – even gap – on that news, right? Well, yes, but that’s not what happened.

The stock fell 5% that day and then continued to fall further the next day, declining almost $30 before finding support for traders to get better positions.

Sometimes, it’s best to fade the news, no matter how great the news is. Let’s look at the charts:

Notice the consolidation period which occurred through most of February and March which resolved into the ‘trend move’ or price swing to the upside. The moving averages have provided key support for this stock for quite some time.

Let’s look at the stratospheric rise of Potash Corp:

Don’t you wish all stocks behaved as nicely as this one?

This stock shows how it can be rewarding to find a solid stock, perhaps from a fundamental analysis scan, and then hold your conviction for as long as possible, or until a clear reversal signal is given.

Until price breaches the rising 20 period EMA, odds generally favor higher prices. Be sure to watch for a potential ‘blow-off’ top as more and more people get involved or interested in this stock. When everyone sees and expects the same thing, odds are the trend is about to end.

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Stock Market Overview

Apr 26, 2008: 12:26 AM CST

Let’s take a quick ‘fly-by’ of the major US Stock Market Indexes for clues about what may happen next week:

Some observations about the daily chart of the S&P 500:

Price is testing upside resistance via horizontal line.

The 20 and 50 period moving averages completed a bullish cross (green arrow).

There is semi-strong support via an upside trendline (not drawn) off the March lows.

The moving averages could provide support when/if tested.

The falling 200 period moving average is bearish, and could provide resistance should the market trade higher.

There’s a slight flat momentum divergence with price as it swings higher.

Let’s pull it back to the Weekly Chart:

Quick observations about the S&P Weekly chart:

Price is trapped between the key 20 and 50 period moving averages.

The falling 50 may provide a bit of preliminary resistance

Price supported on the 200 period weekly average.

The recent up-swing is occurring on reduced (relative) volume (bearish non-confirmation)

There appears to be a strong resistance level (via horizontal line) about the 1,430 level.

Conclusion:

Remember that the Federal Reserve makes its policy announcement next week, and is generally expected to cut rates 25 basis points. This could be bullish for the market, but is the market already pricing this expectation in?

Be careful next week – “Fed Days” can be very volatile and unpredictable (especially for newer traders).

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Dollar Recovery Could Shake Commodities

Apr 25, 2008: 10:12 AM CST

This week, the US Dollar Index has recovered slightly, and price finds itself above key resistance and attempting a new swing high. What might this mean for commodities?

First, the US Dollar Index is breaking above a consolidation pattern, which was preceded by a positive momentum divergence. Should price break the $73 level, the next upside resistance target would be $75.

Notice the strong support level just above $71.

Recall that the Dollar Index and the CRB (Commodity) Index are inverse relationships. A strengthening dollar (or at least an upside rally or counter-swing up) would be bearish for commodity prices.

In other words, an upswing here would lead to lower gold and oil prices, and potentially rice, wheat, and other commodity prices (not all commodities trade alike).

Let’s look at the CRB:

Indeed, as the dollar rallied, commodities fell. Price seems destined to test its 20 period moving average at $410, but something more ominous could be on the horizon.

Notice the negative momentum divergence – as price made a higher swing high (barely), momentum actually made a lower swing high, indicating loss of momentum.

Also, the pattern comes as price may be forming a double top reversal pattern. If indeed this pattern completes, price could break down and retest the rising 200 period moving average near $355 or $360. That would be an interesting development.

Keep watching these two indexes for clues of strength and weakness, and realize that any bearish signal on one could be confirmed by a bullish signal on the other.

And of course, falling commodity prices – in the economic environment we’re in – would likely be bullish for the US Stock Market.

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US Dollar and Commodities

Apr 24, 2008: 9:56 PM CST

One of the major intermarket relationships is that of the US Dollar Index and various Commodity Prices. Generally, the US Dollar trades strongly inverse commodity prices.

Let’s look at it before discussing it further:

Typically, a falling US Dollar index is inflationary, and inflation occurs with higher commodity prices (I am using the CRB Index in this example, though there are other indexes some traders prefer).

Commodities refer to gold, crude oil, wheat, rice, silver and other prices that don’t necessarily trade together as a unified whole, but often share similar trends.

It’s important to note that the CRB Index has made new highs while the dollar has made new lows. This is a fascinating relationship to track, and you can track it with individual commodities.

Remember that some commodities are ’safe havens’ from inflation, and gold is one of those. Oil is quoted in US Dollars, so that when our index falls, oil prices rise accordingly due to currency aspects.

A country’s currency speaks to the health of the economy (what does that say about the current state of the US Economy?), but a weaker currency isn’t horrible news for a country.

Multi-national companies (think big, blue chip stocks) often do well due to favorable conversion rates back into US Dollars, but sometimes small cap stocks are hurt by a weaker currency.

American tourists fare poorer shopping overseas than do those visiting the US and converting their home currency into dollars. But that is for another post.

Let’s continue to view the inverse relationship on a lower time-frame:

There is much to learn about intermarket relationships, but it can often help to begin your analysis with the Dollar (currency) trend and then build from there.

It’s not as important where you start your analysis, because it all revolves back around to itself.

Continue to study how the relationship of stocks, bonds, commodities, and the Dollar (currency) plays out and shifts over time – in so doing, you may find trading opportunities (or confirmation) you didn’t consider previously!

 

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