US Dollar Should Impact “Sustainability” of Stock Market Uptrend

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Originally posted at Briefing.com

A quick look at the Weekly and Daily charts of the US Dollar and price patterns suggests lower prices down to the 2011 lows could be in the works. If that plays out, expect stocks to continue much higher in 2013.

For almost 5-years now, the US Dollar has apparently slowed down its bigger picture descent by developing a range between its 2008 lows and 2009 highs. If we take a closer look at the patterns in 2012, we can see that there is a Head & Shoulder Top in place, on a Weekly Chart, with its "neckline" support along those lows. This suggests a breakdown could easily take the currency down to its 2011 lows and possibly the 2008 lows in due time.

Of course, the other side of the coin, is the potential "failure of a H&S Top" which can be considered very bullish. When you spot these H&S Topping patterns, it is key to recognize if the pattern is "failing" when price manages to rally back up over its Right Shoulder towards the Head. In those cases, the downtrend line off the Head and Right Shoulder has been broken and a new uptrend is in effect. Those Shorts betting on the breakdown of the H&S Top are now in a losing trade and add to demand as they are forced to cover in the new uptrend. If that plays out, it's quite possible we could see the Dollar trade back up to 2009/2010 range highs.

As for the effect the US Dollar has on Stocks, the relationship is historically an "inverted" one. A weak US Dollar typically means Stocks will move up, especially those related to the Commodity, Energy and Gold complex. Multi-national companies like KO, MCD, KMB, PG, DEO, etc, also tend to do perform better as profits "appreciate" overseas.

Bottom line, keep watch on the US Dollar action around this key price zone as it should be a key component to the "sustainability" of the current strong uptrend in the stock market here in 2013.

Below is the 5-year Weekly Chart with the 2012 Head & Shoulders Top highlighted.

usd 5 feb 2013

Below is a 1-year Daily Chart of the US Dollar ETF, UUP. Interestingly the last 5-months has carved out its own "mini-H&S Top" within the Weekly's "Right Shoulder" pattern. Again, the same caveat applies, where a rally back up over the Right Shoulder towards the Head, would negate the "H&S Top" pattern as a new uptrend would be underway.

uup 6 feb 2013

What do you think? Let me know if you agree with my analysis or if there's anything more constructive you'd like to see with this Swing Trader report for the new year. Email me at swingtrader @ briefing.com

For those interested in more individual stock analysis, you can find further trading ideas/set-ups daily through the "Liquid Momentum Focus List" available through a subscription to Briefing In Play Plus, as well as shorter-term day/overnight trading opportunities on the Briefing Trader service.

Any further questions, comments, or suggestions can be emailed to Scott Smith, CMT, swingtrader @ briefing.com

Source: Briefing.com

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