Dollar Rolling Over After 4 Consecutive Negative Days? – Not Exactly

The markets have rallied into the end of the week as the dollar has been shaking off the overbought condition that it had accumulated in the first three weeks of May. The bull flag that I discussed on Wednesday has since broken down and is no longer in play. The dollar index has closed lower now for four consecutive days and has in fact breached the 50 MA. So does this all mean that the dollar’s recent move was a dead cat bounce? No, it doesn’t, and here’s why:

 

I have heard some noise that because the S&P has closed above the 50 MA, it is now headed higher once again and that the bearish sentiment was overblown. The noise I am hearing is not coming from market technicians and the reason is because no market technician worth more than $5c would call today’s move a breakout. First off, the candle that represents todays trading is a spinning top. A spinning top is similar to a doji. Both candles are signals of a pause, a moment of indecision, or a pivot point. In other words, no such breakout can be confirmed with a doji or a spinning top. You do not have to be a market technician to understand this concept – if there truly was a breakout, it would make sense that the candle would be a marubozu or some type of engulfing candlestick that shows no downside momentum throughout the trading day.

Secondly, the volume is not only below average, but it is weak even without considering average volume as only 120M shares moved on the SPY today. Again, any market technician should know the Dow Theory and that “volume confirms moves”. Weak volume on what appears to be a breakout is an indicator that price activity may be lying to you, and in this case I believe it is.

Lastly, it is common knowledge that the market generally gets a lift on Friday and being the day before Memorial Day weekend, many are on vacation early and are trying to take advantage of the 4 consecutive days off as the markets are closed onMonday. Light volume almost always gives the market an upside bias especially since POMO has a bigger effect with lighter trading. In short, if the market is to reverse course, it needs to do more to confirm this move.

 

Trading inverse to the market and closing below the 50 MA was the dollar. Volume was higher than the previous two days but still below the 20 day average which goes back to the initial increase in volume near the YTD low and is a good short term moving average to use here. Today and the 19th were the only two selling days that you could make an argument where there was distribution volume, but even so, the amount of accumulation volume easily trumps the 2 days of distribution volume.

Again, the closing price was not confirmed by volume, and in addition, the price managed to rally off of the lows as it found support at the 26 MA. From a technical standpoint, it made sense for the dollar index to pull back this week after a 3 week rally, but going back to the point I made about Memorial Day weekend, historically, the market gets a lift around this time of year, though it is usually short lived. Giovanni Moreano of CNBC posted an analysis on how the stock market trades leading up to and after Memorial day and here is some of the data:

 http://www.cnbc.com/id/43157752

In the past 20 years, the major U.S. indices have been, on average, relatively flat in the week prior to Memorial Day. In recent years, however, they have been slightly negative.

A week after Memorial Day, all three indexes posted a gain, with the NASDAQ showing the biggest average gain, up 1.42 percent.

Within a month, those gains fizzled for the S&P 500 and Dow, both turning negative returns. And in recent years, those losses have accentuated, down about 2 percent or more.

Though the markets have rallied into Labor Day, the S&P has on average a -2% return in the 2 months following Memorial Day with the Dow behind at -2.13% and the Nasdaq ahead with -1.73%. Trading in 2010 fits this description perfectly as the dollar peaked in June and the market bottomed in early July. The dollar has only rallied just below 3% from its YTD low last month. If we are to follow historical trends here, then the dollar could rally anywhere from another 14 to 17 percent in the next 2 months based on the 2009-2010 timeframe. That is quite a move in a short period of time, but it has been done before and it appears to be happening once again.

So price activity has been weak over the last couple of days, but I believe that the dollar’s uptrend remains intact. Reasons include, the light holiday trading volume, historical performances, and most importantly, the European debt contagion coupled with the ineptitude of Greek, Portuguese, and Spanish politicians to make any significant changes for the better in their countries. So to those who are short the market, short the Euro, or long the dollar, remain patient because it isn’t time to jump off of the train yet.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Dollar Rolling Over After 4 Consecutive Negative Days? – Not Exactly

  1. Pingback: Dollar Rolling Over After 4 Consecutive Negative Days? – Not Exactly » Greece on WEB

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