Dollar Rebounds As Dow Loses Over 279 Points

Last Friday I warned of the credibility of the “breakout” on the SPY SPDR citing that a spinning top candle combined with below average volume could not be considered a breakout despite the close above the 50 MA. I also persisted with my sentiment yesterday citing bad housing data from the Case-Schiller report and the Greek bailout being fundamentally bearish for the Euro. Today, the market opened lower after a paltry ADP jobs report. Consensus was that anywhere from 170,000 to 200,000 jobs were added last month. The release missed the low end of the consensus by 132,000 jobs (78%). That’s right, 38,000 jobs were added last month. Pathetic. Additionally, the ISM manufacturing index came in at 53.5, missing the consensus of 57.6. The market sharply sold off with no signs of stoppage intraday. The dollar initially opened lower but rallied in the afternoon session and particularly, in the last 15 minutes of trading.

As referenced above, I warned that the spinning top candle from Friday’s trading was suspect and not confirmation of a breakout even though the price had closed above the 50 MA. After today and yesterday, it appears that we have an evening star reversal on the SPY. For those who are not familiar, an evening star is a two day reversal pattern which includes a trading gap and a hanging man candle (Monday) followed by a reversal (today) that erases all or close to all of the previous candle’s trading range, including the wick or bottom tail. The gap up from the first candle is typically and exhaustion gap. Exhaustion gap’s typically come at the end of a trend though they can represent a pullback which is often mistaken for a false rally. For more on exhaustion gaps and bearish reversal patterns visit Gap Analysis and Bearish Reversals

In addition to the reversal, the SPY broke below the 50 MA today though it did not sell off enough to test the 100 MA or support at 131. Though neither of these levels were breached, it appears that the bears now have control of this market after the gigantic 2.25% reversal and we should expect to see the 100 MA tested soon, if not by the end of the week.

Moving on to the DIA, unlike the SPY, support at 123 was breached though the 100 MA is still a few points away and there is additional support at 122. Both the DIA and the SPY formed evening star reversals on heavy volume and both closed below their respective 50 MA. The DOW appears to be the weaker index and may prove to be the better of the two to play from the short side. DXD is a great way to short the DOW if you would like to gain additional leverage. While the DOW was down 2%, The DXD was up around 4% as the option premiums surged while the price closed well above the previous pivot of $17.

The dollar opened lower which is unusual when the market is also down as the two generally act inverse to each other. However this kink was worked out in the afternoon session as the dollar ETF UUP rallied from the low of $21.24 to close just at $21.39, just fractions below the highs of $21.41 which came in just the 15 minutes. Though the dollar is still trading below its 50 and 20 MA, those two MA’s are still trending higher and today’s candlestick bullishly engulfed the lows and highs of the previous candle which completed a key reversal in the dollar. On top of that, volume was also above average at 6.8M and once again represents accumulation volume as today’s trading volume eclipsed that of the last 5 days, all of which were negative days. It is widely known that volume confirms moves and in this case we have a high volume reversal following a 5 day, low volume pullback which clearly suggests that the pullback was in fact, just a pullback.

The COT report from last week also shows that bearish sentiment in the dollar has weakened, and likewise, bullish sentiment in the Euro has weakened.

I’ll continue saying this until it no longer applies but the best strategy right now is to be long the dollar, or short the Euro, or short the market. At the very least, you should be hedging your equity longs with covered calls or puts and collecting income from the option premiums. After today’s major move, it feels as if the window to get in on this trade may be closing as now the dollar is certainly no longer overbought after the 5 day selloff which was convincingly snapped today.

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

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