Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
I mentioned a few weeks ago everything had become an "inverse" dollar trade. [Jun 22, 2012: All About the Dollar] While that relationship lessened some during this week long rally, the dollar really did not falter much other than to fall back to the support of the 50 day moving average. If this rally is to continue, based on the algo's, it appears we need dollar weakness. A lack of a "new higher high" would also be nice but we're already getting darn close. This "dollar must suck" trade was not necessarily so in the 'old days' but has become more of the rule in recent years, as the dollar has been a flight to safety trade. Compared to a stock this move may not seem like much, but within the currency market the magnitude of this 2 day move is quite astonishing.
(I am using the UUP ETF rather than the USD chart since there is a one day lag on stockcharts.com)
Contrast that with the Euro, which has tracked in inverse fashion the past 2 days aka since the ECB cut rates. In fact the Euro directionally is very aligned with the S&P 500 of late – although the magnitude of movement is obviously quite different.
At this point the market has essentially given back the entire move we've enjoyed save for the gap up Friday morning. Meaning unless you were positioned for the "Monti Miracle" Thursday night (when futures were actually down 0.4% an hour before the "breakthrough") the entire move has been regurgitated. Of course we do count gaps at the end of the day, so the indexes are still well ahead of where they were Thursday evening, but being positioned for a binary outcome such as that and then being able to take advantage of it are two different things.
For the Fibonacci fans, this level is the 38.2% retrace of the move off the 6/25, 6/26 lows. A 50% retrace would be 134.30ish on the SPY ETF chart, so something in the low 1340s.
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