The re-emergence of volatility

The S&P 500 and global stock markets may have found a near term peak, but how does that matter when trading the Forex market? Or more specifically, the US Dollar?

First thing we should do is dissect the S&P 500 since this is the “broad market” indicator of choice for most equity market players. And I must admit, trying to find a “top” in recent years has not been an easy feat, and perhaps we haven’t found one yet either. For arguments sake we will assume we have. Currently, we have equal legs in price from the 2011 lows following the “flash crash” to 2015 highs, which equals the lows in 2016 to the highs of 2018. Obviously, it was equal in price, just not equal in time. But the formation is an AB=CD move (blue lines). You can also see we have not reached the 261% Fibonacci ratio which is at 2990 either, which may or may not still happen in this current uptrend.

Let’s look a little closer to the price action of the last year:

What you will notice is since 2016 we were following a very strong and well-mannered channel higher, but at the end of 2017 we rallied sharply out of the channel higher. Right after the State of the Union by President Trump, the market quickly reversed and back into the channel. If you would like to insert your many reasons for the stock market rally, then reversal, feel free to fill this out the form below:

(Insert Clever Reasoning Here) _________________________________________________________________________



Technically, we call this reversal back into the channel a throw over. And no, it is not a bullish formation either. Especially if we break back below the channel. Currently, we are holding the support near the 127% extension but the 200DMA and channel is just below near the 2550 level in the S&P 500.

Okay, what does this mean for the US Dollar? If you look at the DXY (US Dollar index) the dollar has been sold aggressively since President Trump’s inauguration in January of 2017, however as of late we did manage to find a low.

The DXY found support at a Fibonacci confluence of the 127% extension of the 2016 lows to 2017 highs, and also the 161% extension of the 2017 fall bounce. Although in a bear flag formation, the US Dollar seems to have found some near term support. Now what’s interesting is if you overlay the DXY over the SPX (S&P 500) you will see that the USD is finally finding support as stocks have found a near term top/high.

The US Dollar correlation to the S&P 500 or equity markets in general has been non existent in the last several years. For the most part, global equities have been rallying for as long as many can recall, and the US Dollar has been following its own path with monetary policy changes, rate expectations, political influences and economic data. But for those of you who recall the “Great Financial Crisis” here in the US in 2008-2009 roughly, you probably vividly recall how the US Dollar was a “safe haven” as stocks were sold around the world. The US Dollar was scooped up as investors went back into cash, out of “risky” investments. As the world’s reserve currency, this would be a common relationship if stocks do continue to fall near term.

In recent months I have had difficulties coming up with a reason(s) for the US Dollar to get a “dead cat bounce” or some sort of rally. The recent rise in yields and more hawkish FOMC has not moved the needle much for the US Dollar bulls. Well, perhaps this is it. If stocks have really topped near term, could the US Dollar be in for a relief rally as investors look for a safe haven? Well, last I checked, the US Dollar is still the world’s reserve currency. At least for now.

Blake Morrow

Forex Analytix