One way to quantify if a bottom is in for the U.S. Dollar is take a look at previous macro price patterns and see how the S&P 500 stock index – an asset class market and a proxy for the global economy — has called 4 out of the last 5 up-turns for the U.S. Dollar index over the past 3 years. When the S&P 500 gives a weekly bear shift of its short-term trend – an occurrence which includes both a trendline penetration on a closing basis and a weekly directional line shift, the dollar index generally rallies.  The indication was 4 for 4 since the panic of 2008, but missed this March as a stock sell-off reversed itself quickly, and was followed by one more leg down for the dollar.   This powerful correlation exists because sell-offs in asset class markets create financial uncertainly, and traders and investors respond but moving into U.S. Treasuries fist, and asking questions second. The historic beneficiary of market down-turns has been the U.S. Dollar. When we add in the same technical occurrence happening in the both the S&P 500 and the EURUSD – which makes up over 60% of the Dollar Index – the correlation is 4 for 4 since 2008.

Technically we won’t know if the S&P 500 has a bear shift till this coming Friday –5-27-11 –when the weekly candle closes, as we only consider price triggers on a closing basis. Last week’s low in the S&P 500 futures – 1316 for the e-mini contract – is a very important technical level and a daily close below it would also indicate a shift in the primary trend on the daily chart to lower. The EURUSD already gave us a weekly bear shift on May 13. Given the correlation between U.S. dollar strength and asset class market sell-offs, traders and investors need to be watching this week’s currency trading activity even closer than usual.

To attend our next free webinar on how to determine market trend shifts go to: Overview of Directional Lines

Jay Norris is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.

Trading futures or Forex is a risky endeavor and not suitable for all investors!

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