Dollar and the US Stock Market

There is this famous inverse correlation between US Dollar and the stock market. If you believe the relation will keep up being strong in the future and that the Dollar is driving stocks, you might just analyze a chart of the Greenback to get some clues on where stock prices might be going. So here is a plot of the US Dollar Index:

From a purely technical standpoint, the Dollar is moving down in a nice trend channel. With a little stretch, you could argue for a "declining wedge" and "MACD divergence" in the last months, which usually would be a sign for upcoming reversal. The wedge doesn't show up very strong, so I wouldn't bet the bank on a change in direction yet.
Bottom line: based on the Dollar chart, I have to be bullish on stocks FOR NOW.

Some Nice Swing Trading Setups on the LONG Side

Despite all the chatter about market weakness and expecation for a major correction, we can identify some nice short term swing trades on the LONG side. Check out the following stocks for a quick trade if the market behaves well after job numbers:

BTU: Entry @43, Stop@41, Target@50 = risk/reward 3.5
TUP: Entry @45.5, Stop@44.5, Target@50 = risk/reward 4.5
ABT: Entry @51.6, Stop@50.8, Target@54 = risk/reward 3

The Small Cap Sell-Off

It was quite interesting the last days to observe the nature of the recent sell-off: large cap stocks held up quite well. While the Russel 2000 was underperforming for quite a while, its decline really accelerated this week. The lower curve on the following charts depicts the ratio of small (Russel 2000) to large cap (DJ) stock prices. While the ratio was declining for the entire rally, it shot up in the last four weeks:

So the decline is one one hand a sign for risk aversion, but might also be an indicator for a healthy longer term rally: we are seeing a normal sector rotation from risky small caps to more conservative large caps (who BTW benefit from a weaker dollar, because large companies tend to be more export oriented.)

In any case, I don't expect the decline to be over. We propably will see a bounce soon due to oversold conditions, but I expect stocks to be under pressure for some time because of missing catalyst. The wild card, though is the Dollar. The chart shows us a stable downtrend so far, you might could argue for mild momentum (MACD) divergence as a sign of stabilization:

Anybody Interested in Joining a Virtual Trading Group?

I would be interested in establishing a "virtual trading group" in order to have more targeted interation with mind like traders and bring our trading "to the next level". Check out Dr. Brett's post about the topic. I think it would be great to form a group of 3-5 investors with similar style and experience. The group would regularly (2-3 times a week) discuss trades, the markets, successes and failures. In order for this to be beneficial to everyone, it would be important to have similar backgrounds/philosophy.

So here is what I'm looking for:

- Trading US equities on a short time frame (2 days - 4 weeks)
- At least three years experience and solid knowledge about technical analysis, risk management and trading psychology
- Style influenced by Alexander Elder (not a must)
- Located in Europe (makes it easier with the time difference, not a must either)
- Part time traders OK (or even preferred, because that's what I am)

So if you are interested, shoot me a mail.

S&P 500: this chart makes me nervous - VERY nervous

As traders, we are constantly questioning our own positions and looking for signs why we might be wrong. Despite the fact that I am (was) very bullish recently, I have to acknowledge that the S&P 500 chart doesn't look bullish at all. You might be surprised, because a superficial look tells you that prices keep going up. Let me focus your attention on some observations:
I would like refer you to a tool, which was introduced by Dr. Alexander Elder: the Force Index (FI). The FI is basically price change multiplied by volume. I use this index to visualize divergences between volume and price action. Higher prices without participation of volume indicates upcomming trend reversals.

Lets look at this relationship for the last 8 months: we can identify three distinct periods:

- Marked with (1) on the chart: right after the ultimate low in March, the market put in a strong reversal and kept climbing for almost two months on declining volume. Look how nice the divergence shows up in the chart.

- (2): The divergence (1) indicated upcoming weakness. In fact, the S&P went through a consolidation phase in June. Note that we actually had a bullish divergence during phase two (green lines).

-(3): The market responded after the bullish divergence (2) with higher prices. Upside volume has become increasingly weak and divergence (3) has been shaping up.

- (4): This is the point that concernes me most: during phase (3), we had three minor pull backs. Each of the pull backs was stronger in size and volume, as you can see when looking at the Force Index (4). So it looks like the bears are gaining strength on every dip. Divergence (3) shows that bulls are running out of steam. The big price jump beginning of July was triggered by the beginning of the earnings season. Guess what: Q3 earnings season just started and the chart looks to me more like prices getting exhausted.
I'm really contemplating closing all my long positions and start going short. S&P price target at least 950.

Buy Semiconductors After Intel's Quarter?

Intel reported a blowout quarter yesterday evening and the question arises if one should buy semiconductor stocks in anticipation of more positive earnings news from companies in this sector.

Let's take a look at what happened in Q2, when Intel kicked off the semiconductor earnings season on July 13:

We had a similar situation: Intel surprised to the upside. It was a profitable trade to buy into the momentum and trade a semiconductor ETF (IGW). Even if you got in at the new relative high around $39, you were able to book a 10% gain after three weeks. Since market conditions are comparable, I think we could see a similar move now. The risk reward ratio is the compelling feature of this trade: even if you did put a stop at the breakout point around 38, your ratio would have been 1:4.

BTW, I prefer the leveraged version USD for this trade.

Market Acting Tired

Despite my bullishness, I have to recognize the fact that the market is acting tired. Divergences all over the place. Earings really need to kick butt to keep the rally alive.