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Index Wrap

Dollar weakness has us monitoring Europe

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Stocks mirrored a continuing slide in the dollar today with the broader S&P 500 Index (SPX.X) 1,009.38 -1.90% shedding 19 points as the U.S. Dollar Index (dx00y) 93.60 -0.41% reversed early morning stability to close below Monday's lows after this weekend's G7 meeting called for floating currencies.

At today's close, I'm also noting that the German DAX was holding a 19-point gain at this morning's 09:00 AM EST mark, but not unlike the U.S. equity indices fell 103-points, or 3.04% into its close to finish at 3,307.

In tonight's wrap, we're going to try and quickly investigate whether it is the dollars slide and weakening that had a negative impact on today's trade, or was it OPEC's announcement that it will cut oil production by 900,000 barrels per day that had investors around the world selling stocks in today's trade.

It is my thinking, based on observation, that the weaker dollar had greater impact on a souring investor sentiment in today's trade than OPEC trying to limit supply in an attempt to support oil prices, which have fallen from $31 per barrel to $27 in just the past month.

Tomorrow morning I think trader should be keeping an eye on the dollar's trade in the overnight session, where the U.S. Dollar Index (dx00y) 93.60 -0.41% is currently trading down 0.39 points, after having shown some firming earlier this morning, to now trade below its post-G7 meeting lows on Monday.

I'm going to quickly show a point and figure chart of the German Dax ($DAX) from www.stockcharts.com and we will then compare its current price action to that of the euro currency. While I will not argue that the thought of higher oil prices would be viewed as a negative for industry and consumers around the world, the recent decline in crude from $31 to $27 per barrel may in itself have been saying world demand for oil wasn't strong enough for the amount of supply on the markets.

German DAX ($DAX) - 50-point box scale

A "high pole warning" has developed in the DAX, and today's late session reversal came quickly. At the bottom of the DAX's chart, I've marked a "low pole warning" where these warnings are simply a warning or "alert" to a potential reversal of trend. The first sign of weakness for the DAX would be a trade at 3,250.

I've circled in PINK certain price points that would mark early April (4), July (7), August (8) and September (9). I made these observations when I looked at the following point and figure chart of the euro currency, on its point and figure chart.

The main observation is that the euro was gaining strength against the dollar since April (4), but the euro then topped out against the dollar in June (6) and the euro then fell into early September (9) (see how the DAX hit a high at 3,650?), but all of a sudden, the euro has started to rebound, but the DAX has yet to respond.

Here's my comparison chart of the Euro Index ($XEU), which is FREE at www.stockcharts.com.

Euro Index ($XEU) Chart - 0.50 box size

I've circled in PINK the same points on the Euro Index chart that I circled on the German DAX equity index. My observation is that the DAX didn't seem to mind a stronger Euro from April to June (6) and a weakening euro in July (7) just seemed to boost gains. However, the recent reversal from early September (9) and a recent Euro Index "buy signal" at 113.50, which was generated on Friday (just before the G7 meeting this past weekend) and continued gains has the DAX pulling back further, especially late in its session today. Near-term, I think we should monitor the DAX for support at 3,250 and a decline from their may be an alert from the German MARKETS that something is wrong. If the euro is making gains, it would be my thought that the strong euro and perhaps weak dollar is seen as having a negative impact on Europe's largest economy, and might spill over to other world markets.

It's great for U.S. exporters to find a weaker dollar, but if one of your trading partners sees its economy "go in the tank" because its exports aren't selling, then U.S. exports to Germany may not be very strong.

Let's look at the pivot matrix for tomorrow, where today's trade saw the major indices trade and close below their WEEKLY R1s, where I thought support should have been found on weakness.

Pivot Analysis Matrix

First. I will say that I got "whacked" and I mean whacked for a loss in a bullish day trade that I profiled in the QQQ this morning for a QQQ trade at $34.31, which when profiled showed the U.S. Dollar Index (dx00y) trading relatively unchanged, but firm. At the time of profile, the QQQ was trading below its WEEKLY pivot of $34.29, but I thought the dollar firming and a QQQ trade at $34.31, just above $34.29 would get a rebound from modest morning losses. This was well after the OPEC news was in the markets. As it turns out, the dollar went south and so did my QQQ bullish trade, which was the profiled as stopped out at $33.92.

I looked for a rebound in the QQQ back to $34.06, but the rally never came, and after WEEKLY S1 of $33.73 was violated to the downside at approximately 12:40 PM EST, $33.73 was solid resistance.

The NDX.X itself shows correlative resistance at its WEEKLY S1, and the QQQ might have to, if it didn't fall further from the 04:00 PM EST mark.

We see correlative support levels at various WEEKLY R1s tomorrow, and on further dollar weakness tomorrow, would be downside risk assessment levels for bulls, and reward targets for bears.

I've made a note at the DAILY U.S. Dollar Index (dx00y) that the high,low, close is based on the 09:05 AM EST trade to 03:00 PM EST interval.

I saw a large increase in volume in the QQQ after the 04:00 PM EST mark, and volume came on lower price action. This had me profiling a last-minute short in the QQQ at $33.28, stop $33.56 with a $32.87 target (WEEKLY S2), as I viewed the late selling on volume as being a defensive move into tomorrow's open, perhaps by some institutions concerned that further overnight weakness in the dollar, might make for a gap lower open.

As I type (08:35 PM EST), the U.S. Dollar Index (dx00y) has started tomorrow's trade (Thursday) at 93.76, and the QQQ saw a last tick at $33.34. For now, this would have to confirm some thought that equities are keying off the dollar.

Tonight's overseas trade will be worth of note for any night owls that are curious, and we'll see what the dollar did overnight, along with foreign markets.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Interval

WEEKLY S1, the shorter-term 21-day SMA and base of upward regression were all violated as support in today's trade and has a "zone of support" as an area to now look for QQQ support. Bears may have sat on their hands (which I should have done a little longer on my bullish profile) today, and if a weaker dollar is seen tomorrow, buyers might sit on their hands again. Oscillators are still rather negative and has the QQQ looking vulnerable to WEEKLY S2 of $32.87 near-term, and if we were to see the dollar unravel, with the U.S. Dollar Index (dx00y) below its WEEKLY S2 of 93.33, then QQQ downside momentum could build to its rising 50-day SMA, where I would certainly thing that even the most bearish of bears in the QQQ would come in as buyers and get a bounce going in the QQQ.

Today's trade saw a net loss of 2 stocks to point and figure sell signals in the narrower NASDAQ-100 Bullish % ($BPNDX) and has the bullish percent slipping back to 79% and still "bear correction" status. It would take a reversing lower reading of 74% for this bullish % to turn back to "bear confirmed" status.

S&P 500 Index (SPX.X) Chart - Daily Interval

The SPX broke my aggressive trend from the August relative low, and not shown, would also have the SPX breaking below a longer- term upward trend if taken from the March lows to the August relative low (which would come very close to overlapping the aggressive upward trend shown on the SPX's chart). With the SPX now nearing the 1,004 level, it is entering into some past consolidation, which we would look for some buyers to provide support, but I'm now viewing RESISTANCE back at 1,025.

Tonight I would have traders observe the narrow "zone of support" in the SPX chart from 1,003 to 1,005, when we look at the Dow Industrials Chart in a minute.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 5 stocks to point and figure sell signals as the bullish % fell 1% to 81.20%. Still "bull confirmed" and would take a reversing lower reading of 76% to reach "bull correction" status, and further lower reading of 72% for "bear confirmed" status.

The narrower S&P 100 Bullish % ($BPOEX) saw a net loss of 2 stocks to point and figure sell signals as the bullish % slipped to 84%. It would take a reversal reading of 82% to have the OEX turning "bull correction" status. This narrower bullish % has not shown a reversing lower reading since turning up to "bull alert" status in March at 28% bullish.

Dow Industrials (INDU) Chart - Daily Interval

I think the INDU would be a closer match to Germany's DAX, and perhaps today's 3% decline in the DAX and a more "modest" 1.5% decline may indeed represent a benefit to the U.S. of the weaker dollar, but today's trade may also be of importance in our understanding that dollar weakness can still be a near-term negative on what takes place around the world, which can spill over to U.S. equity markets.

Marking 9,600 as resistance as the Dow bumped against this level on Tuesday and again today, but follow through from Monday was to the downside. The close below our upward regression channel is a negative.

The INDU can play an important role in investor psychology, just as the DAX plays a role in European investor psychology.

Today's trade saw a net loss of 1 stock to a point and figure sell signal and this has the very narrow Dow Industrials Bullish % ($BPINDU) reversing lower to "bull correction" status. A net loss of 1 more stock to a point and figure sell signal would have this narrow bullish % reading 78% and turning "bear confirmed" at a high level of risk for bulls. I would now have to place more importance on Dow support holding at 9,300 as a more critical level of support.

Jeff Bailey

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