…and then there’s the Dollar

So, then there’s the sister question I usually get when asked about the euro: What about the dollar?

In contrast to the euro, the dollar had a great run from mid-March to June. But since June, the dollar has had quite the sell-off. So, let’s see if we can answer the same euro questions with regards to the dollar: Is the dollar still a short or should you be looking at a potential long position?

Please review the chart of the UUP, which is the Powershares Dollar Trust ETF, with my added notations:

 

The UUP is a way for investors to buy the dollar without actually buying the currency. You will see the March to June rally I mentioned above and the current sell-off.  I have drawn an important resistance in red and (2) important supports in blue.

First, please notice the up trending support. If you had been following the UUP and noticed the break of that support level in June, wouldn’t you have probably entered a short position? Probably. Well, now look at the longer-term horizontal support at around $23.75. Is it surprising that we bounced right at that support? Probably not. So, what might you expect the UUP to do if it happened to break below the support at $23.75?

Next, let’s draw our attention to the most recent down trending resistance. If you had been monitoring the UUP last week when it broke through that resistance, wouldn’t that have been a great time to enter a long position in the UUP or dollar? Of course.

The Tale of the Tape: The breaks of support and resistance levels are usually great potential signals for entering trades. Recently the UUP broke through its resistance, which seems to be a great sign to look for a long entry on any pullback. However, if the UUP were to break down below the $23.25 area of support you might have a great opportunity to short the UUP or dollar.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

First, the Euro…

As a stock market coach, I answer a lot of the more common questions: What do you think of the market? Where is gold going? Should I buy the dollar? Etc. Lately I have been discussing some of the recent price action in the euro. So, let’s take a look at it.

As most of you probably already know, the euro had a rough go of it from mid-March to June. Since June though, the euro has had a nice rebound. Well, is the euro still a buy or should you be looking at a potential short?

Please review the chart of the FXE, which is the Currency Shares Euro Trust ETF, with my added notations:

 

The FXE is a way for investors to buy the euro without actually buying the currency. You will see the March to June sell-off mentioned above and then the June to present rally.  I have drawn (2) important resistances in red and (2) important supports in blue.

First, please notice the down trending resistance #1 that I have drawn. If you had been following the FXE and monitored the break through that resistance in June, wouldn’t you have made a long purchase? Well, take a look at the down trending resistance #2, which is the longer-term resistance. Is it much of a surprise that we stalled at $133, right at the resistance? So, what might you expect the FXE to do if it happened to break above the #2 resistance?

Next, let’s analyze the supports. If you had been monitoring the FXE and saw the break of the up trending support #1, wouldn’t that have been a signal that the euro was going lower? Now, notice how the FXE approached the up trending support #2 and quickly bounced back off of it. So, what would you expect the FXE to do if it broke below the #2 support?

The Tale of the Tape: Breaking of support and resistance trend lines can be great signals for entering trades. Right now the FXE is sandwiched between a longer-term support (#2) and resistance (#2). If the FXE were to break above the resistance, a long position in FXE or the euro itself might be a great trade. On the contrary, if the FXE broke below its support, shorting the FXE or the euro would be the ideal trade.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

…and the markets go bye bye.

The S&P down 31 points. The Dow down 265. The Nasdaq down 68. Are we surprised? I don’t think so, but let’s look at my previous Chart School newsletters:

The charts above are from my Chart School newsletter “Back to bull, or still a bear?” (For review, go to http://www.themeshreport.com/back-to-the-bull-or-still-a-bear/) We knew that the 50-day SMA had recently crossed below the 200-day on the S&P 500. We also knew that the 50/200 crosses tend to be a reliable sign of trend change, in this case from up to down. Next:

We noticed this pattern forming on the S&P. This wedge tends to be a bearish pattern in a downtrend (For review, go to http://www.themeshreport.com/driving-a-“wedge”-between-bulls-bears/) Although we could have just as easily broke through the topside resistance, the weight of the evidence seemed to hint otherwise. Today seems to have validated that stance. And finally:

There is a correlation between rates on the S&P (For review, go to http://www.themeshreport.com/as-rates-go-update/) As you can see from the 2nd chart above, rates recently broke a key level of support. If rates were going lower, we have every reason to believe the markets would go lower also.

The Tale of the Tape: In previous days & weeks we have seen hints to a potential downside reversal. The 50/200-day SMA crossover told us there was a likely trend change. So, we probably wanted to look at the last 6-week market rally with skepticism. The market was forming a common bearish price pattern in the form of the rising wedge, thus the clock seemed to have been ticking. Finally, rates broke lower last week, which lately means the market will follow. It would appear that all the advance evidence told us that a sell-off might be coming.

Today’s break below the 200-day SMA, and break through the bottom support of the wedge pattern outlined above, tells us to expect lower prices. It would be advised to pull back on long positions and looking to enter short positions moving forward. Market conditions can always change, but until they do, lookout below!

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

As rates go – update

About a week ago I wrote a Chart School article that highlighted the correlation between interest rates and the stock market, specifically the S&P 500 (see http://www.themeshreport.com/as-rates-go-the-rally-goes/).  For a quick review, please look at the following charts:

The purpose of the above chart was to show the correlation between a drop in 10 Yr. rates and drops in the S&P. More often than not, the 10 Yr. also led the market.

This chart showed important levels in which to watch to gauge the possible future short-term direction of rates, and in turn, the stock market. Specifically, did you notice the support at 2.90?

Well, look at the next chart:

As you can see, the 10 Yr. has broken its key support at 2.90. This would lead me to believe that rates are going lower. Will the market follow? Are investors moving into bonds, thus sending rates and possibly the stock market lower?

The Tale of the Tape: After breaking through its 2.90 support, the 10 Yr. T-Note is pointing towards lower rates. In the past, the 10 Yr. has moved with the S&P 500, and a majority of the time it has been the leader.  So, with rates apparently going lower, the expectation would be for the S&P 500 to move lower as well. Cutting back on long positions might be advised. Rather, short positions should be the higher probability trades.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT

Driving a “wedge” between bulls and bears

While I was analyzing the charts of the S&P 500 and the Dow yesterday, I noticed a common price pattern know as a Wedge. It is simply a technical chart pattern composed of two converging lines connecting a series of peaks and troughs. Wedges can take the form of a rising wedge or a falling wedge.

Falling wedges form during a temporary pause of upward price rallies. Rising wedges will typically occur during a falling price trend and usually hint to a break lower. Even though a falling wedge is seen as bullish and a rising wedge as bearish, technical analysts such as myself look for a ‘breakout’ of this wedge pattern as bullish on a breakout above the upper line or bearish on a breakout below the lower line.

Please look at the chart I have below:

You can see that I have highlighted the rising wedge that seems to be forming on the S&P 500. If you looked at the Dow you would see the same pattern. Since we are currently in an overall down trend, the rising wedge should be looked at as bearish and a breakdown of the rising support is expected. However, this is not a sure thing. The markets could just as easily break higher and resume the short term up trend.

The Tale of the Tape: The markets are forming a common technical pattern know as a rising wedge. This would appear to signal an impending breakdown. However, this pattern should not be acted on without confirmation. The confirmation would be the break of the up trending support. Assuming this happens, entering short positions would be favorable. On the flip side, if you are bullish on the market, one might enter long positions on a pullback to the up trending support or on a break above the up trending resistance.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT