US Dollar Index Bottoming?

May 3, 2007: 10:08 AM CST

Here is the most updated weekly swing chart of the US Dollar Index, which is on par to do one of two things: Make new lows or find support & reverse (temporarily).

dollar-index-may3.jpg

Notice the two momentum divergences. We are currently experiencing a ‘buy’ divergence at a place where the market reversed in the past (2005) and odds favor a reversal in price soon from a momentum standpoint (although the trend is quite obviously down currently).

What does this mean? When the dollar (index) decreases relative to other currencies, your dollars can purchase less goods and are less valuable, even above and beyond an inflationary standpoint.

It also means, as others have indicated, that the Dow and Markets making new lifetime highs aren’t as significant as they could be if the dollar index was making new highs as well. The new price highs are less significant because the dollar is worth less.

Envision you found a great, guaranteed investment opportunity in Mexico that would return 30% in a year, and say you invested $100,000 for a profit of $30,000. The only catch is that you had to invest in pesos. When you invested, assume $1 bought 10 pesos. The investment was 1,000,000 pesos for a return of 300,000 pesos. Not bad, right?

Now let’s assume that Mexico’s pesos fell relative to the dollar by a significant amount – 50% (for illustration purposes). Let’s assume that the exchange rate now was only $0.50 for 10 pesos. To put it another way, $1 = 20 pesos. You now exchange your 1,300,000 pesos for US dollars and wind up with … $65,000 US Dollars.

So, even though your investment returned 30% in a year, you are actually DOWN $35,000 dollars because the peso was worth much less by the end of the year.

Of course, this is an extreme example, but realize that the Dollar Index has declined 33.5% since its 2002 high, which means that your dollars are worth about 1/3 less than they were in 2002.

Always cross-check inter-market relationships when determining long-term price and the implications of price on your investments. The Dow may be making new highs, but your dollars aren’t.

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DIA Intraday May 1-3

May 3, 2007: 9:39 AM CST

I’ve posted a chart of the 15 minute action of the DIA (Dow Jones ETF) for a study on momentum divergences.

dia-15-min-may3.jpg

This illustrates the buy divergence occurring around noon on May 1st which led to the “Impulse Buy” trade concurrent with the breakout and new momentum high.

The market has ended a buy swing and is now consolidating in price, and subsequent ‘higher highs’ are resulting in momentum divergences, indicating consolidation at best and retracement as likely.

The price action also visually confirms the decreasing momentum (buying pressure) as price struggles to make new highs. Support appears to be at 131.88, but should this level fail, odds favor continuation to the downside. For now, I expect continued consolidation before the all-important “Jobs” report and economic data Friday.

If you’re unaware of this data, realize that the Jobs Report (first Friday of the month) has the potentially to move the market dramatically (sometimes over 150 points in the Dow).  What usually happens before this report is market consolidation as traders are usually unwilling to take positions before the report and often prefer being ‘flat’ prior to its release.

Nimble Day-traders often can profit handsomely from the sudden volatility that occurs as a result of the report, should the numbers differ from consensus.

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Weekly Market Charts – May 2

May 3, 2007: 7:47 AM CST

The market notched another record closing high for the Dow today. Such headlines inspire more yawns than cheers now. Are investors becoming complacent?

Here is a look at the swing chart of the major indexes:

Dow Jones

dow-weekly.jpg

  • New Price Highs confirmed by New Momentum Highs. This suggests higher prices are yet to come.
  • Uptrend is solid with regular and (arguably) shallow pullbacks. Odds favor continuation.

Nasdaq

nasdaq-weekly-may2.jpg

  • The Nasdaq is showing a different momentum pattern than the Dow.
  • New price highs are NOT being confirmed by New Momentum Highs. This is not comforting.
  • Market successfully ‘tested’ the rising 50 period MA
  • Red “trend” oscillator recently bounced off zero and turned up – a bullish signal
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Link: TraderFeed – Trading and the Adrenaline Rush

May 2, 2007: 9:26 PM CST

Dr. Steenbarger recently posted a comment from Dr. Bruce Hong regarding the “Fight or Flight” adrenaline response that we all feel at some point during trading.

I have experienced this many times and likely will do so in the future, and so will almost all traders, especially when situations do not go as expected.

Here are a few quotes that may be eye-opening:

“[The sudden adrenaline rush] is a response that is AUTOMATIC and not under conscious control” (example, if we are physically under attack by a ferocious animal).

Remember, it’s automatic. Now, every one is aware of the obvious physiologic responses that WE CAN FEEL. You report that this is uncomfortable – it’s not. It’s just biology.”

All our thought processes are directed to threat and elimination/avoidance of that threat. So instead of thinking things through carefully, we make abrupt, impulsive decisions.”

So, you can force yourself to wait 5 minutes, do jumping jacks to ‘burn off the adrenalin’, and, most importantly, use visualization BEFORE you enter the trade…. In that way, you don’t perceive a threat, but a contingent event – so you don’t develop a threat response.”

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May 1st Market Commentary

May 1, 2007: 9:07 PM CST

The Dow Jones made yet another all-time closing high today, while the Nasdaq failed to confirm.  Although both indexes ended higher, the day’s action was choppy at best.

dow-may-1.png

  • Notice the creeping and solid uptrend
  • Notice New Momentum Highs confirming New Price Highs, heralding higher prices are likely to come
  • Notice the solid uptrend on the red 3/10 MACD oscillator
  • It would appear we are ready for a sell-signal, yet oscillators fail in strong recent trend action

Chart of the Nasdaq:

nasdaq-may-1.png

  • In the most recent swing high, the 3/10 oscillator failed to make a new high – it’s just a warning
  • Price recently ‘tagged’ the rising 20 period moving average – a buy signal
  • Most recent support is confirmed at the rising 20 period moving average
  • The Nasdaq had a strong sell-day yesterday, rinsing out some of the excess and clearing for possible new highs
  • The trend still creeps higher, warning shorts to stay out

As a bonus, here is a recent chart of market leader Apple (AAPL):

aapl-may-1.png

  • We had a euphoric price move that gapped up higher with New Momentum and Price Highs
  •  Odds favor greater continuation to the upside after a fresh retracement
  • Support ‘held’ at the rising 50 period moving average recently
  • We appear ready to experience a corrective downswing for a possible trend entry signal
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