Let's look at the DXY vs S&P, which illustrates some of the recent market moves pretty well.
Lately, the DXY and S&P have been inversely correlated. In other words, when the DXY moves up the S&P moves down, and vice versa, when the DXY moves down the S&P moves up. The 100 day trend of inverse correlation is starting to wane and both price trends have decayed from ultra bearish back to random, as illustrated by the RWI signal showing a converging uptrend and downtrend line.
Historically, this environment is a bullish signal for the market. My outlook changed from extreme bearish to neutral as this played out, and I think this chart helps illustrate why. Both price trends were fairly decisive since the downtrend from October 2021 began: every time the DXY set higher highs, the S&P set lower lows (yellow dots). But now, the symmetry of the bearish impulse has faded and weakness was shown (blue dot), and the prices returned to randomness.
Unless the RWI signal can break out of the "peak bearish line" in the chart, we should expect the random trend to continue and the bearish trend to fade, for now. Take a look at the "peak bearish line". Lately, every time the RWI uptrend signal (the green trend) meets the "peak bearish line" (straight red line). Yesterday was a good example, we hit the line, then bounced off today. Chances are, you felt pretty bearish all of a sudden yesterday, based on the market action, because I sure did! I made sure not to overreact, because we did not breakout of this resistance.
I expect these symbols to become uncorrelated soon. DXY is practically touching all time resistance on a 50 year channel. However, if or when the DXY continues to break out with force above 108, we should expect more bearish action in equities. If it doesn't, I expect a lot of chop in the DXY and a rather bullish S&P until the price cannot sustain itself, possibly similar to a 1999-2000 type scenario, if we haven't already seen it. The current sentiment in the equities markets seem to express that we have already seen all time highs, for now. If that was the case, I would've expected this S&P rally in the past few weeks to be a bit more subdued. Overall, I'm not sure if we actually have, and it would be foolish to trade on the assumption that we have 100% seen the top. With that said, I would expect even more bullish S&P action, possibly with some chop mixed in (see S&P in September 2020), with lots of DXY chop. Obviously, you should only allocate risk according to your personal plan. I think much of the market is afraid to go along with *any* plan at the moment, and personally, as traders, we must divide our risk equally here and be sure to not be 100% bearish until the dragon comes out to play again. Consider how many shorts are being closed at a loss and how many frustrated traders will open longs for vengeance.
I'm not trying to suggest a trade here but I do hope this gives some rationale on the latest price action.
What do you think?
Thanks for taking a look, and I hope you enjoyed the idea. Don't forget to hedge your bets!
- your fringe chartist
Lately, the DXY and S&P have been inversely correlated. In other words, when the DXY moves up the S&P moves down, and vice versa, when the DXY moves down the S&P moves up. The 100 day trend of inverse correlation is starting to wane and both price trends have decayed from ultra bearish back to random, as illustrated by the RWI signal showing a converging uptrend and downtrend line.
Historically, this environment is a bullish signal for the market. My outlook changed from extreme bearish to neutral as this played out, and I think this chart helps illustrate why. Both price trends were fairly decisive since the downtrend from October 2021 began: every time the DXY set higher highs, the S&P set lower lows (yellow dots). But now, the symmetry of the bearish impulse has faded and weakness was shown (blue dot), and the prices returned to randomness.
Unless the RWI signal can break out of the "peak bearish line" in the chart, we should expect the random trend to continue and the bearish trend to fade, for now. Take a look at the "peak bearish line". Lately, every time the RWI uptrend signal (the green trend) meets the "peak bearish line" (straight red line). Yesterday was a good example, we hit the line, then bounced off today. Chances are, you felt pretty bearish all of a sudden yesterday, based on the market action, because I sure did! I made sure not to overreact, because we did not breakout of this resistance.
I expect these symbols to become uncorrelated soon. DXY is practically touching all time resistance on a 50 year channel. However, if or when the DXY continues to break out with force above 108, we should expect more bearish action in equities. If it doesn't, I expect a lot of chop in the DXY and a rather bullish S&P until the price cannot sustain itself, possibly similar to a 1999-2000 type scenario, if we haven't already seen it. The current sentiment in the equities markets seem to express that we have already seen all time highs, for now. If that was the case, I would've expected this S&P rally in the past few weeks to be a bit more subdued. Overall, I'm not sure if we actually have, and it would be foolish to trade on the assumption that we have 100% seen the top. With that said, I would expect even more bullish S&P action, possibly with some chop mixed in (see S&P in September 2020), with lots of DXY chop. Obviously, you should only allocate risk according to your personal plan. I think much of the market is afraid to go along with *any* plan at the moment, and personally, as traders, we must divide our risk equally here and be sure to not be 100% bearish until the dragon comes out to play again. Consider how many shorts are being closed at a loss and how many frustrated traders will open longs for vengeance.
I'm not trying to suggest a trade here but I do hope this gives some rationale on the latest price action.
What do you think?
Thanks for taking a look, and I hope you enjoyed the idea. Don't forget to hedge your bets!
- your fringe chartist
Comment:
Also note the 10 year DXY trend is at odds with the long-term decades old trend:
Comment:
Here's the same chart with with the SPY Correlation Coefficient:
It's hard to be certain with either move here. During the '99 bubble and '15 market turmoil, we saw some positive correlation but now it's not so clear. It would also be poor form to extrapolate any opinion solely on this chart, but it is interesting. Will we see another DXY rally??
It's hard to be certain with either move here. During the '99 bubble and '15 market turmoil, we saw some positive correlation but now it's not so clear. It would also be poor form to extrapolate any opinion solely on this chart, but it is interesting. Will we see another DXY rally??
Comment:
I messed up the description of the dots on the chart, my apologies. I think it's still grokable, but it was supposed to say:
Blue dot = DXY HH, SPY HL
Yellow dot = DXY HH, SPY LL
Blue dot = DXY HH, SPY HL
Yellow dot = DXY HH, SPY LL
Comment:
We broke the "peak bearish line" in the chart, meaning, at the very least, the DXY could return to ATH and will test 109 as resistance or support. The plan is to immediately pivot more defensive until proven otherwise.
If monetary policy adjusts and quantitative tightening gets more intensive, which I expect to happen in the next few years, after Treasury yields uninvert, I expect we will break out to the upside when that happens. It's not very quantitative.
Here's an interesting thought: think about how the FED defines "quantitative". Suppose I formulated a new "quantitative" trading strategy based on moving averages from 6 months or a year ago. That is pretty much what the FED is doing with their data, looking at backwards looking averages with data that is already 6+ months old. If anyone traded like this, they would be broke, because it would be incorrect. So why is this socially acceptable that they can adopt a strategy where everybody in society gets to eat the losses?