CHARTS: Stock market headwinds building
From Dr. Richard Smith, Founder, TradeStops:
Headwinds are continuing to pick up steam for US stocks and there’s increasing evidence that the music is in danger of stopping. In this case, the music has been the declining US dollar.
Since January, I’ve predicted a surge higher in the stock market based on the historical relationship between the US Dollar and the S&P 500 (SPX). The surge has happened and the market has risen 10% higher in the last 8 months.
Historically, the stock market is bullish when the US Dollar is bearish. Yet, we knew that the dollar had moved strongly higher since its low in the first half of 2016. It triggered a new Stock State Indicator (SSI) Entry signal in November.
What we didn’t know was, by the middle of January, the dollar had already topped just a week or two earlier. As the dollar moved lower, the SPX moved strongly higher.
There’s increasing evidence that the dollar could be nearing the end of its fall. If it does, it will likely be a huge problem for US stocks.
Right now the US dollar is bouncing strongly off of the same $91 support line that it bounced off about a year ago. The volume-at-price chart below shows that there’s not a lot of price-volume at this $91 level.
The lack of price-volume support at $91 is frankly quite surprising. Usually such big reversal points have heavy volume. Nonetheless, we need to respect the fact that $91 has twice turned back a big decline now.
For the moment it looks like the dollar could easily rise to the $95 – $97 level where it would encounter heavy overhead price-volume resistance.
The commercial traders of the dollar, aka the smart money, are bullish. They’re in the same position they were in when the dollar was at its low in 2016. Normally, the smart money has a net negative position, but today their dollar holdings have once again touched the neutral zero line.
The chart below shows what has happened each time the smart money got back to neutral for their US dollar holdings.
Our time-cycle forecast for the dollar has been very accurate. It’s showing that the move lower in the dollar is about to end. There looks to be a short-term bounce through the end of November and then a large move higher in 2018 that could last almost the entire year.
Last Friday I said that the chart of the 30-year down trend in long-term US interest rates was the most important chart in the world today. The chart of the US dollar is probably a close second.
I’m currently looking for the US dollar to rally to the $95 level… and for the US stock market to take a breather… possibly even as much as 5% – 7%.
If the dollar falls below $91, however, it will be a huge confirmation of even higher prices and valuations for US stocks.
Richard Smith, PhD
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